Japan


Home > About Toshiba > Investor Relations > Toshiba Overview >

Business Risk Factors

Risk factors relating the Group and its business

Source: Financial Review of Annual Report 2017 (FY2016)

The business areas of energy, infrastructure and electronic devices, on which the Group focuses, require highly advanced technology for their operation. At the same time, the Group faces fierce global competition. Under such circumstances, major risk factors related to the Group recognized by the Company are described below. However, they should not be regarded as a complete and comprehensive statement of risk factors relating to the Group, and there are unforeseeable risk factors other than those described below. The actual occurrence of any of those risk factors may adversely affect the Group's operating results and financial condition.

The risks described below are identified by the Group based on information available to the Group as of August 10, 2017 and involve inherent uncertainties, and, therefore, the actual results may differ.

1. Risks related to management policy

(1) Strategic concentrated investment

The Group now focuses its capital expenditure and its investments and loans in the Memory area. However, this area may not grow as anticipated, the Group may not maintain or strengthen its competitive power in such area, or the relevant investments may not fully generate the anticipated level of profit.

(2) Success of strategic business alliances and acquisitions

The Group has actively promoted business alliances with other companies, including the formation of joint ventures, and acquisitions, in order to grow new businesses in research and development, production, marketing and various other areas. If the Group has any disagreement with its partner in a business alliance or an acquisition in respect of financing, technological management, product development, management strategies or otherwise, such business alliance may be terminated or such business alliance or acquisition may not have the expected effects. In addition, additional capital expenditures and provision of guarantees may be needed to meet the obligations for such partnership business that may be incurred due to the deterioration of the financial condition of the partner, as well as for other reasons, and as a result, the Group's operating results and financial condition may be adversely affected.

(3) Business structural reform

The Group as a whole implemented a large scale business structural reform in the fiscal year ended March 31, 2016 ("FY2015") with respect to the System LSIs and Discrete Semiconductor businesses in the Electronic Devices & Components segment, the PC, Visual Products and Home Appliances businesses in the Lifestyle Products & Services segment and the corporate staff divisions, etc. (at that time), and the Group has incurred a large amount of expenses for such business structural reform. The Group now have some good prospects for improving our unprofitable businesses. However, if any other business becomes unprofitable due to further change in the business environment or any other problem occurs with respect to the business of which structural reform has completed, the Group may incur further expenses for business structural reform due to the necessity of new or additional measures, and in such case the Group's operating results or financial condition may be adversely affected.

To Top

2. Risks related to financial condition, results of operations and cash flow

(1) Business environment of the Energy Systems & Solutions business

A significant portion of the net sales in the Energy Systems & Solutions business is attributable to sales related to capital expenditures by the private sector centering on operators of electricity utilities in Japan and overseas. Accordingly, this business could be affected by trends in such capital expenditures, and low levels of private capital expenditures due to the economic recession, trends in tax reduction measures related to infrastructure investments, higher construction costs arising from factors such as appreciation of personnel expenses, and other changes in the business environment of private business operators, and exchange rate fluctuations may have a negative impact on this business.

Furthermore, this business promotes and involves the supply of products and services for large-scale projects on a worldwide basis. Post order changes in the specifications or other terms, delays, appreciation of material costs, changes to and suspension or stoppage of plans for various reasons, including policy changes, natural and other disasters and other factors, may adversely and substantially affect the progress of such projects. In addition, in the projects where the percentage-of-completion method is used for revenue recognition, the Group may retroactively reassess profits that had been recorded as accrued and record them as losses if, among other things, the original estimate is underestimated, the expected profits from such projects do not meet original expectations, or the projects are delayed or cancelled for some reason. In the past, the Group recorded losses on certain projects.

With respect to projects regarding plants of operators of electricity utilities, the Company accepts some orders that involve businesses with functions that do not exist in the Group by forming consortiums to share the responsibilities with its partners. The orders are accepted as blanket orders at fixed prices, which include design, engineering, procurement and construction. In such cases, the Company generally assumes the obligations owed to the ordering party jointly and severally with the partner companies, and, therefore, (i) if there are deficiencies in the partner companies' business operation abilities, (ii) the partner companies fail to perform their share of business, (iii) the financial condition of the partner companies deteriorates, or (iv) the partner companies file for in-court rehabilitation, then the Company will assume the obligations of the partner companies and expenses, and cash expenditures may increase unexpectedly by a large amount. In the case of a fixed-price contract, losses accrued from increase in construction cost and delay in delivery are to be borne by the company that accepted the order, in principle, except for the case where a structure to share the expense with the customer has been introduced. In particular, in certain projects in the Nuclear Power Systems business, which is one of the main businesses of the Energy Systems & Solutions business, the cost unexpectedly increased from the initial estimates and the work process was unexpectedly prolonged, due to such reasons as (i) safety standards of many countries were changed one after another due to raising of the required level of safety measures against terrorism and large-scale natural disasters and (ii) there was no precedent that could be used as a benchmark with respect to a certain project in an area where there had been no opportunity for construction of a nuclear power plant for a long period of time and another project for construction of a state-of-the-art facility.

For the reasons stated above, it may not be possible to pass on to the customer, the partner company or others any additional costs incurred due to the stoppage of the project, changes in regulations or other business circumstances, delays in the work process, or unexpected events specific to first models and such costs may not be collected, or a dispute may arise over such costs. In fact, there are certain projects regarding which the Group is taking legal action. With respect to the investments in an operator that promotes a certain project in which investment is made in order to secure the order from such operator, the Group may incur liability for damages to a customer or any third party, additional expenses, impairments in investments, increases in the financial burden or delays in payouts, depending upon the trends in projects. Difficulties may also arise for the continuance of certain currently ongoing projects due to a change in the policies of fund providers and other factors.

With respect to projects regarding plants of operators of electricity utilities, submission of documents such as a bank guarantee for the guarantee of performance or expenditure is usually required when bidding, accepting the order, and commencing the construction. However, due to recent lowering of investment grade and aggregation of financial conditions of the Company, submission of a bank guarantee may be difficult, cost for submission of a bank guarantee may increase, or submission of cash collateral or cash deposit in a bank in lieu of submission of a bank guarantee may be required, and, as a result, opportunities to accept the orders may be lost and cash expenses may increase unexpectedly. Furthermore, as stated in "5. Risks related to trade practices (1) Parent company's guarantees" below, when a subsidiary of the Company accepts an order for a project, such as a plant, the Company may provide guarantees as a parent company with respect to the subsidiary's payment and performance of its obligation under the contract. Since the Company has actually provided the parent company's guarantee with respect to the large amount of payment obligation and performance obligation with respect to projects regarding plants for which orders were accepted by subsidiaries, if the subsidiaries fail to perform their obligations due to deterioration of the subsidiary's financial condition or other reasons, the Company will be required to fulfill the parent company's guarantee and bear a large amount of additional cash expenses, and, consequently, the Group's operating results and financial condition may be adversely affected.

(2) Business environment of the Infrastructure Systems & Solutions business

The Infrastructure Systems & Solutions business provides diversified solutions for the areas of public infrastructure, buildings and facilities, and industrial systems.

Since a significant portion of the net sales in this business is attributable to sales related to expenditures on public works and capital expenditures by the private sector, reductions or delays in spending on public works, low levels of private capital expenditures due to the economic recession, trends in tax reduction measures related to infrastructure investments, higher construction costs arising from factors such as appreciation of personnel expenses, and other changes in the business environment of private business operators, trends in building and housing construction on a worldwide basis and other factors may have a negative impact on this business.

This business is promoting its business development on a worldwide basis. Post order changes in the specifications or other terms, changes to and stoppages of plans for various reasons including policy changes, changes in regulations, appreciation of material costs and personnel expenses, natural and other disasters and other factors, may adversely and substantially affect the progress of this business. In addition, exchange rate fluctuations and other factors may also have a negative impact on this business.

In addition, in projects where the percentage-of-completion method is used for revenue recognition, the Group may retroactively reassess profits that had been recorded as accrued and record them as losses if, among other things, the original estimate is underestimated, the expected profits from such projects do not meet original expectations, or the projects are delayed or cancelled for some reason. In the past, the Group recorded losses on certain projects.

(3) Business environment of the Retail & Printing Solutions business

The Retail & Printing Solutions business provides retail solutions for the retail distribution industry and service industry, offices, manufacturing and logistics industries and particular customers, as well as printing solutions for offices, and manufacturing and logistics industries. The results of this business may be adversely affected by any changes in political and economic conditions, taxation, environmental regulations and foreign exchange; and postponement or suspension of capital expenditure by reason of customers' earnings deterioration, acceleration of industrial realignment due to compounding and systemization, more intensified market competition with competitors, new entries into such industry, and similar events.

(4) Business environment of the Storage & Electronic Devices Solutions business

While the substantial portion of operating income/loss of the Group relies on the Storage & Electronic Devices Solutions business, the market for this business is highly cyclical and depends on demand and supply, and the results of this business tend to change with economic fluctuations and, in particular, to be heavily affected by exchange rate fluctuations. The market for this business is subject to intense competition with many companies, mainly overseas, manufacturing and selling products similar to those offered by the Group. Furthermore, demand for the products is somewhat difficult to accurately predict because it depends on such factors as technical innovation, trends in the consumer market, and the actions of ordering parties. Even if significant levels of capital expenditures are made, unforeseen market changes may cause changes in demand at the time of sale, and it may result in a mismatch between the production of particular products based on the sales volume initially expected and the actual demand for such products, or cause the business to be adversely affected by a decrease in product unit prices due to oversupply. In particular, the price for NAND flash memory, the Group's major product in this business, may undergo rapid change. Fluctuations in the results of this business may materially and adversely affect the Group's overall business performance. In addition, the market may face a downturn, the Group may fail to market new products in a timely manner, production may not go as planned, or competitiveness of the Group's current products may be lost or decrease due to a rapid introduction of new technology. Economies of scale with respect to the manufacture of NAND flash memory are significant and there is intense competition to develop and market new products. Therefore, significant levels of capital expenditures are required to maintain and improve competitiveness in both the price and quality of products. However, there is a possibility that the necessary amount of capital expenditure cannot be secured at appropriate timing depending on the financing environment of the Group and other factors.

(5) Business environment of the Industrial ICT Solutions business

A significant portion of the net sales in the Industrial ICT Solutions business is attributable to sales related to private IT investments by, among others, the financial sector and major manufacturers, as well as national and local government expenditures on public IT investments. Accordingly, this business could be affected by changes in such investments. Low levels of private IT investments due to economic recession, and reductions and delays in spending on public IT investments may have a negative impact on this business. Since the solution services field of this business accepts most orders by executing service contracts and the term from order to delivery is relatively long, additional costs over original expectations may be incurred, if, among others, the original estimate is underestimated or a problem occurs in project management. Furthermore, in the case of delay of delivery or defects of delivered systems, the Group may be required to pay ordering parties damages, in addition to bearing additional costs.

(6) Business environment of Others

The market for personal computers and televisions is intensely competitive, with many companies manufacturing and selling products similar to those offered by the Group and under the circumstances where earnings are structurally difficult to be recorded. Additionally, such businesses may be significantly affected by exchange rate fluctuations, wide availability of alternative products or lower priced products, economic fluctuations and consumer spending trends which may be affected by the scheduled increase in consumption tax, among other things. Moreover, any rapid fluctuation in demand may result in price erosion or increases in prices of parts and components, which may adversely affect the Group's financial results with respect to this business. Large scale business structural reform was implemented in such businesses, but in the event where the reform programs fail to produce the expected results, or in case of similar events, additional measures may be needed.

(7) Financial risk

Apart from being affected by the business operations of the Company or the Group, the Company's consolidated and nonconsolidated results and financial condition may be affected by the following major financial factors:

(i) Deferred tax assets

The Group accounted for deferred tax assets. The Group reduces deferred tax assets by a valuation allowance if, based on the weight of available evidence, some portion or all of the deferred tax assets are unlikely to be realized. Recording of valuation allowances includes estimates and therefore involves inherent uncertainty.

The Group may also be required hereafter to record further valuation allowances, and the Group's future results and financial condition may be adversely affected thereby.

In addition, the Group may be affected by future tax regulatory changes as the recordation of deferred tax assets and valuation allowances have been made based on the currently-effective tax regulations.

(ii) Exchange rate fluctuations

The Group conducts business in various regions worldwide using a variety of foreign currencies and is therefore exposed to exchange rate fluctuations.

Although the Group makes efforts to minimize the effect of fluctuation in exchange rates by balancing sales in foreign currencies and purchase in foreign currencies, there is a possibility that operating income/loss will be affected by exchange rate fluctuations due to a change in the balance in each business segments and other factors. Also, there is a possibility that such foreign exchange losses will occur, as resulting from a difference between the exchange rates at the time of recognizing and at the time of settlement of the credits and debts in foreign currencies, in case of steep exchange rate fluctuations.

Foreign currency denominated assets and liabilities held by the Group are translated into yen as the currency for reporting consolidated financial results. The effects of currency translation adjustments are included in "accumulated other comprehensive income (loss)" reported as a component of equity attributable to shareholders of the Company ("shareholders' equity"). As a result, the Group's shareholders' equity may be adversely affected by exchange rate fluctuations.

(iii) Accrued pension and severance costs

The most important assumption that affects the calculation of net periodic pension, and severance cost and benefit obligations, is discount rate and expected rate of return on plan assets. The discount rate is determined considering such factors as the yield of highly-rated fixed income corporate bonds currently available, and expected to continue to be available by the payment date of pension benefits, and the yield of fixed income government bonds. The expected rate of return has been determined considering such factors as composition of plan assets held, risk that can be assumed from investment method, actual returns, basic policy for investment of plan assets, and market trends. The Group recognizes the funded status (i.e., the difference between the fair value of plan assets and the benefit obligations) of its pension plan in the consolidated balance sheets, with a corresponding adjustment, net of tax, included in "accumulated other comprehensive loss" reported as a component of shareholders' equity. Such adjustment to "accumulated other comprehensive loss" represents the result of adjustment for the net unrecognized actuarial losses, unrecognized prior service costs, and unrecognized transition obligations. These amounts will be subsequently recognized as net periodic pension and severance costs calculated pursuant to the applicable accounting standards. The funded status of the Group's pension plan may deteriorate due to declines in the fair value of plan assets caused by lower returns, increases of severance benefit obligations caused by changes in the discount rate, salary increase rates or other actuarial assumptions. As a result, the Group's shareholders' equity may be adversely affected, and the net periodic pension and severance costs to be recorded in "cost of sales" or "selling, general and administrative expenses" may increase.

(iv) Impairment of long-lived assets, goodwill and listed shares.

If there is an indication of impairment for a long-lived asset and the carrying amount of such asset will not be recovered by the future undiscounted cash flow, the carrying amount may be reduced to its fair value and a loss may be recognized as an impairment with respect to such difference. As of March 31, 2017, 227.4 billion yen of goodwill was recorded in the Company's consolidated balance sheets in accordance with U.S. Generally Accepted Accounting Principles. Out of the above, 160.1 billion yen was allocated to the Energy Systems & Solutions business, most of which was recorded due to the acquisition of Landis+Gyr conducted in July 2011. Goodwill is required to be tested for impairment annually. If an impairment test shows that the carrying amount of a reporting unit goodwill exceeds the implied fair value of that goodwill, the amount of such excess, up to the total amount of the goodwill assigned to the reporting unit, will be recognized as an impairment. In addition to the above annual impairment test, if any event indicating a decline in corporate value owing to changes in the business environment or other factors arises, and the total of the carrying amounts exceeds its fair value, an impairment will be recognized. Therefore, additional impairments may be recorded, depending on the valuation of long- lived assets, the estimate of future cash flow from business related to goodwill, and changes in the discount rate for the weighted average capital cost. The Group, which is accounted for under a going concern basis, recorded (i) impairment of long-lived assets in the amount of 53.4 billion yen in the fiscal year ended March 31, 2015 ("FY2014"), mainly attributable to the Discrete business, (ii) impairment of goodwill in the amount of 47.4 billion yen and impairment of long-lived assets in the amount of 166.0 billion yen in FY2015, mainly attributable to the POS business and Transmission & Distribution Systems business, and (iii) impairment of goodwill in the amount of 16.9 billion yen and impairment of long-lived assets in the amount of 34.5 billion yen in the fiscal year ended March 31, 2017 ("FY2016"), mainly attributable to the Electric power sales business, and may record similar impairment losses additionally or newly in the future.

Also, if the market price of listed shares held by the Group as the marketable securities declines, there is a possibility that an impairment loss on the relevant shares will be recorded or that the net unrealized losses on securities will be negatively recognized.

(v) Shareholders' equity and net assets

Westinghouse Electric Company LLC ("WEC") and its U.S. subsidiaries and affiliates, and Toshiba Nuclear Energy Holdings (UK) Limited, a holding company for Westinghouse Group operating companies outside the U.S., (collectively, the "Filing Companies") resolved and then filed for a voluntary petition for rehabilitation proceedings under Chapter 11 of the U.S. Bankruptcy Code (the "rehabilitation proceeding") on March 29, 2017 (U.S. time) with the U.S. Bankruptcy Court of New York. Upon the commencement of the rehabilitation proceedings, the Group recorded losses mainly related to the parent company's guarantee provided to power utility companies for the U.S. Nuclear Projects, and allowance for doubtful receivables for the Company's claims against Westinghouse Group ("WEC Group"), and mainly for this reason, the substantial consolidated net assets of the Group decreased. Therefore, when the Company executes an EPC (Engineering, Procurement and Construction) agreement (i.e., a construction agreement for a construction project that includes engineering, procurement and construction) in overseas markets, the Company may not be able to satisfy the financial standards required by the ordering party, and as a result, the Company's ability to accept orders may be adversely affected.
Some of the business operations of the Company require a special construction business license; however, the renewal of this license requires a certain financial standing. As the validity period of the Company's current license will expire in December 2017, the Company will split off the business requiring the license by October 2017.
As the Group's shareholders' equity shown on the consolidated balance sheet as of March 31, 2017 was negative, the Company's shares were transferred from the first to the second section of the Tokyo Stock Exchange and Nagoya Stock Exchange. If the Group cannot remedy such situation within one year thereof, the Company's stock will be delisted and as a result, the Group's business, operating results and financial condition may be materially and adversely affected and opportunities for shareholders of the Company to sell their shares may be substantially restricted.

(8) Changes in financing environment and others

The Group is obtaining financing through loans and the issuance of bonds that are highly susceptible to market environments, including the financial crisis, interest rate movements and fund supply and demand. Thus, changes in these factors may have an adverse effect on the Group's funding activities. The Group has also been raising funds by issuing bonds or taking loans from financial institutions. In the case the financial markets fall into unstable turmoil, the financial institutions' reduction in their lending in response to the change in capital adequacy requirements, or the downgrading of the credit rating of the Company given by rating agencies, there can be no assurance that the Group will obtain refinancing loans or new loans in the future on similar terms. If the Group is unable to obtain loans for the amount needed by the Group in a timely manner, the Group's financing may be adversely affected. Moreover, because of the amendments of the past Annual Securities Reports and other reports, which is described in "10. Past inappropriate accountings," below and the continuing deterioration in the operating results, the long-term credit rating assigned by Moody's Japan K.K. was downgraded by 1 notches, the long-term credit rating assigned by Standard & Poor's Ratings Japan K.K. was downgraded by 5 notches, and the long-term credit rating assigned by Rating and Investment Information, Inc. was downgraded by 5 notches for the period from the filing date of the Annual Securities Report for the 177th term of the previous fiscal year to August 10, 2017, and the credit ratings may be downgraded further in the future.

In addition, loan agreements entered into between the Company and several financial institutions (the "Loans with Financial Covenants"; the balance as of March 31, 2017 was approximately 260.0 billion yen) provide for financial covenants. Therefore, the Company's obligations with respect to the relevant loan repayments may be accelerated upon demand by the relevant lending financial institutions. Furthermore, in such case, repayment of the Company's bonds or other borrowings of the Company, other than such loan repayment, may be automatically accelerated in accordance with the so-called cross-default clause.

The Company breached the financial covenants based on the downgrading of its credit rating assigned by rating agencies on December 28, 2016. The lending financial institutions have agreed not to accelerate the repayment of loans until March 31, 2017. However, as of August 10, 2017, the repayment of these loans may be accelerated if requested by such financial institutions. If the repayment of these loans is accelerated, the repayment of other bonds and certain borrowings may be accelerated as well. The total balance of the Company's bonds and borrowings (including the Loans with Financial Covenants) as of March 31, 2017 is 1,203.8 billion yen.

The Company will continue to make all possible efforts to obtain the understanding of the lending financial institutions with respect to this, in order to avoid breaching financial covenants and acceleration of repayments. However, if any acceleration of the repayment of the Loans with Financial Covenants occurs, it may materially and adversely affect the Company's business operations and continued existence.

To Top

3. Risks related to business partners and others

(1) Procurement of components and materials

It is important for the Group's business activities to procure materials, components and other goods in a timely and appropriate manner. However, such materials, components and goods may only be obtainable from a limited number of suppliers due to the particularity of such materials, components and goods, and, therefore, such suppliers may not be easily replaced if the need to do so arises. In cases of delay or other problems in receiving supply of such materials, components and other goods, shortages may occur or procurement costs may rise. It is necessary to procure materials, components and other goods at competitive costs and to optimize the entire supply chain, including suppliers, in order for the Group to bring competitive products to market. In addition, a shortage in the electric power supply resulted from the suspension of the operation of nuclear power plants in Japan and a further rise in electricity costs due to the rise of fuel costs affected by exchange rate fluctuations may affect business activities, including manufacturing operations, of the Group, since a stable supply of electricity is essential to the Group's business activities.

Any failure by the Group to procure such materials, components and other goods from key suppliers or any shortage in the power supply or further rise in electricity costs may adversely impact the Group's competitiveness. Furthermore, any case of defective materials, components or other goods, or any failure to meet required specifications with respect to such materials, components or other goods, may also have an adverse effect on the reliability and reputation of the Group and Toshiba brand products.

Suppliers may request the Group, as a condition to continue transactions, to provide a credit guarantee, pay in cash or take other measures on the basis of the Group's delay in announcing its business results, non-inclusion of an unqualified audit opinion or an unqualified review conclusion in the auditor's report or quarterly review report or lowered credit standing of the Group caused by the deterioration of its financial condition, and in such case, procurement from major suppliers may be obstructed or an unprecedented financial burden may occur.

(2) Securing human resources

A large part of the success of the Group's businesses depends on securing excellent human resources in every business area and process, including product development, production, marketing and business management. In particular, securing the necessary human resources is essential in respect of achieving globalization of the Group's businesses and promoting advanced product development and research. However, competition to secure human resources is intensifying, as the number of qualified personnel in each area and process is limited, while demand for such personnel is increasing. As a result, the Group may fail to retain existing employees or to obtain new human resources or require costs more than in the past in order to obtain such human resources.

In order to reduce fixed costs, the Group is implementing personnel measures, including bonus reduction, reduction of remuneration of the management, and revision of various allowances and daily wages. However, the implementation of such personnel measures may adversely affect the Group's employee morale, production efficiency or the ability to secure capable human resources.

Furthermore, with deterioration of business and financial conditions, experienced personnel may leave the Group despite the Group's intention, and it may adversely affect the Group's business operations.

To Top

4. Risks related to products and technologies

(1) Investments in new businesses

The Group invests in companies involved in new businesses, enters into alliances with other companies with respect to new businesses, and actively develops its own new businesses.

Cultivation of new businesses entails substantial uncertainty, and if any new business in which the Group invests or which the Group attempts to develop does not progress as planned, the Group may be adversely affected by incurring investment expenses that do not lead to the anticipated results.

To Top

5. Risks related to trade practices

(1) Parent company's guarantees

When a subsidiary of the Company accepts an order for a large project, such as a plant, the Company, as the parent company, may, at the request of the customer, provide guarantees with respect to the subsidiary's performance under the contract. Such parent guarantees are made pursuant to standard business practices and in the ordinary course of business. If the subsidiary subsequently fails to fulfill its obligations, the Company may be obligated to bear losses as a result.

In addition, with respect to some contracts, since the Company's consolidated net assets, consolidated operating income or credit ratings fall below the respective levels provided for in the contracts with such customers, the relevant guarantees could be required to be replaced by letters of credit, bonds or submission of cash collateral, and in such cases the Group may incur additional expenses.

To Top

6. Risks related to new products and new technology

(1) Development of new products

It is critically important for the Group to offer innovative and attractive new products and services. However, due to the rapid pace of technological innovation, the emergence of alternative technologies and products and changes in technological standards, the optimum introduction of new products to the market may not be accomplished, or new products may be accepted by the market for a shorter period than anticipated. In addition, any failure on the part of the Group to continuously obtain sufficient funding and resources for development of technologies may affect the Group's ability to develop new products and services and to introduce them to market.

From the viewpoint of enhancing concentration and selection of managerial resources, the Group now selects research and development themes more rigorously, with a primary focus on developing original and advanced technologies, with close consideration for the timing of market introduction. In certain products and technological fields, the research and development may not proceed due to more focus on research and development in other products and technological fields, and as a result, the Group's technological superiority may be impaired.

To Top

7. Risks related to laws and regulations

(1) Information security

The Group maintains and manages personal information obtained through business operations. Even though the Group makes every effort to manage this information appropriately, the Group's brand image, reputation and business performance may be subject to negative influences, or the Group may be found to be liable for damages in the event of an unanticipated leak of such information which results in illegal retention or usage of such information by a third party.

The Group also maintains and manages trade secrets regarding the Group's technology, marketing and other business operations. The Group is implementing measures to prevent leakage of such trade secrets outside the Group through maintaining and tightening control of its information management system, training its employees, and other measures.

However, in the past, situations have occurred in which leakage of trade secrets was suspected. The Group's competitive power may be weakened and the Group's business, operating results and financial condition may be subject to negative influences, in the event of an unanticipated leak of such information which results in illegal retention or usage of such information by a third party.

Additionally, the role of information systems and information/communication networks in the Group is critical to carrying out business activities. While the Group makes every effort to ensure the stable operation of, and to improve safety measures for, its information systems and information/communication networks, there is no assurance that the functionality of the information systems and information/communication networks would not be impaired or destroyed by cyberattacks such as computer viruses and unauthorized access, software or hardware failures, discontinuance of information/communication services provided by outside operators, disaster, or other causes, and in such cases the Group's business performance may be adversely affected.

(2) Compliance and internal control

The Group is active in various businesses in regions worldwide, and its business activities are subject to the laws and regulations of each region. The Group has implemented and operates the internal control systems for a number of purposes, including compliance with laws and regulations and strict reporting of business and financial matters. However, in FY2015, it was recognized that inappropriate accountings such as the priority of benefit and advance of expenses were repeatedly conducted in the Company for the past several years, and there was weakness in the internal control over financial reporting. Under the management revitalization structure established on September 30, 2015, the Company carried out the implementation of the appropriate internal control design and operations, and as a result, the Company has already established and steadily implemented most of the measures of its improvement plan for rectifying the material weakness in company-level internal controls over financial reporting in FY2015. However, taking into account the fact that (i) not all the implementation status of the improvement measures have been sufficiently verified due to constraints in the implementation period and (ii) certain items for restatement and deficiencies relating to accounting and the financial reporting process were discovered in the course of the audit of financial statements dated as of March 31, 2016, the Company has judged that there is material weakness in internal controls requiring disclosure with respect to FY2015. Thereafter, in FY2016, measures to rectify such material weakness requiring disclosure that had existed at the end of the previous fiscal year was completed, and the Company judged that internal control over financial reporting for FY2016 was effective, taking into account the status of the assessment of the control design and operation effectiveness of other relevant items.

However, as of August 10, 2017, as a result of an internal control audit conducted by the Company's auditor, the Group was given an adverse opinion due to the existence of material weakness in internal control of the Group requiring disclosure. Therefore, the review process for cancellation of the designation of the Company's shares as "Securities on Alert" stated below may be affected; shares of the Company may be delisted, or, if they will not be delisted, lowered social reputation of the Company may adversely affect the Group's business, operating results and/or the financial condition of the Group; or the opportunity for shareholders of the Company to sell the shares may be substantially restricted.

Moreover, such internal control systems may themselves, by their nature, have limitations, and it is not possible to guarantee that they will fully achieve their objectives. Therefore, there is no assurance that the Group will not unknowingly and unintentionally violate laws and regulations in future. Changes in laws and regulations or changes in interpretations of laws and regulations by the relevant authorities may also cause difficulty in achieving compliance with laws and regulations, or in continuing business in certain regions or business categories, and may result in increased compliance costs. Furthermore, if the Group is in violation of these laws and regulations, the Group may be subject to administrative sanctions, such as fines, or criminal penalties, and legal actions claiming damages may be filed against the Group. In such cases, the Group's reputation may be adversely affected, and the Group's business, operating results and financial condition may be adversely affected. In the past, the Company was imposed fines as administrative sanctions.

(3) The environment

The Group is subject to various environmental laws, including laws on air pollution, water pollution, toxic substances, waste disposal, product recycling, prevention of global warming and energy policies, in its global business activities.

It is possible that the Group may encounter legal or social liability for environmental matters, such as liability for the cleanup of land at manufacturing bases throughout the world, regardless of whether the Group is at fault or not, with respect to its business activities, including its past activities.

It is also possible that, in future, the Group will face more stringent requirements on the removal of environmental hazards, including toxic substances, or on further reducing emissions of greenhouse gases, as a result of the introduction of more demanding environmental regulations or in accordance with societal requirements.

The Group's operations require the use of various chemical compounds, radioactive materials, nuclear materials and other toxic materials.

However, the Group may incur damage, or the Group's reputation may be adversely affected, as a result of a natural disaster, the threat or occurrence of a terrorist incident, or of an accident or other contingency (including those beyond the Group's control) that leads to environmental pollution or the potential for such pollution.

(4) Product quality claims

While the Group makes every effort to implement quality control measures and to manufacture its products in accordance with appropriate quality-control standards, in the past, the Group recalled certain products, and lawsuits and other claims relating to product quality were filed against the Group, and there is no assurance that all products are free of defects that may result in such product quality claims due to unforeseen reasons or circumstances. Furthermore, if material product quality claims occur in large projects, and there are long delays in deliveries to customers or reworking is needed, the Group may be liable for a large amount in expenses or damages.

To Top

8. Risks related to material legal proceedings

(1) Legal proceedings

The Group undertakes global business operations and is involved from time to time in disputes, including lawsuits and other legal proceedings, and investigations by relevant authorities. It is possible that such cases may arise in the future.

Due to the differences in judicial systems and the uncertainties inherent in such proceedings, the Group may be subject to a ruling requiring payment of amounts far exceeding its expectations. Any judgment or decision unfavorable to the Group could also have a material adverse effect on the Group's business, operating results or financial condition. In addition, due to various circumstances, there can be no assurance that lawsuits involving claims for large sums will not be brought, even if the possibility of receiving orders for such payment is quite low.

The Group is under investigation by the European Commission, and other competition regulatory authorities, for alleged violations of competition laws with respect to products that include semiconductors, cathode ray tubes ("CRT"), heavy electrical equipment, and optical disc devices. In addition, class action lawsuits and other claims with respect to alleged anti-competitive behavior regarding certain products brought against the Group are currently pending.

To Top

9. Risks related to directors, employees, major shareholders and affiliates

(1) Alliance in NAND flash memory

The Group has a strategic alliance with a U.S. company, SanDisk Corporation (after being acquired by Western Digital Corporation ("Western Digital"), the company name was changed to SanDisk Limited Liability Company "SanDisk")), for the production of NAND flash memory, which includes production joint ventures (equity method affiliates). If any termination event under the joint venture agreement, such as breach of the agreement by SanDisk, occurs, the Group may purchase SanDisk's ownership interests in the production joint ventures at the price reflecting remaining carrying amount of production facilities held by the production joint ventures. In addition, the Company and Western Digital each provide a 50% guarantee in respect of the lease agreements of production facilities held by the production joint ventures. In the event that Western Digital's operating results or financial condition deteriorate and Western Digital fails to perform its guaranteed obligations, the Company may succeed to Western Digital's guarantee obligations, or the joint venture agreement may terminate due to Western Digital's breach of such guarantee obligations and the Company may purchase SanDisk's ownership interests at the price reflecting the remaining carrying amount of production facilities held by the relevant production joint ventures. If the Company purchases SanDisk's ownership interests, the production joint ventures may be treated as consolidated subsidiaries of the Company.

(2) Alliance in nuclear power systems business

(i) WEC Group

The Group acquired WEC Group in October 2006. The Company's ownership interest in WEC Group (including the holding companies) is 90% as of August 10, 2017. The remainder is held by National Atomic Company Kazatomprom Joint Stock Company ("KAP"). As the Filing Companies filed a voluntary petition for the rehabilitation proceedings under Chapter 11 of the U.S. Bankruptcy Code on March 29, 2017 and the rehabilitation proceedings commenced, WEC Group was deconsolidated from the Company.

KAP, based on a separate agreement with the Company, have been given an option to sell all or part of its ownership interests to the Company at the price equivalent to its initial investment amount ("Put Option"), and KAP will be able to exercise the Put Option in and after October 2017. In the event that KAP exercises the Put Option for all of its ownership interests, the purchase price to be paid by the Company will be approximately 522 million U.S. dollars, and since the Group has to bear the loss that was borne by KAP as a minority shareholder, the Group will incur a certain financial burden and the Group's shareholders' equity will be adversely affected.

(ii) NuGeneration Limited

The Group holds 60% of the shares of NuGeneration Limited ("NuGen"), the Company's consolidated subsidiary, while group companies of ENGIE S.A. ("ENGIE"), a French company, hold the other 40% of the shares of NuGen, and the Company and NuGen have executed a shareholders agreement. As the Filing Companies filed a voluntary petition for the rehabilitation proceedings under Chapter 11 of the U.S. Bankruptcy Code, ENGIE requested the Company to purchase NuGen shares pursuant to the shareholders agreement, and in July 2017, the Company completed share acquisition procedures for all shares of NuGen held by ENGIE at the price of approximately 15.9 billion yen. The financial impact of the transaction that is expected to be reported in the Company's consolidated balance sheets for the first quarter of the fiscal year ending March 31, 2018 ("FY2017") is (i) a 20.5 billion yen decrease in shareholders' equity that includes the impact on the Company of a decrease in additional paid-in capital resulting from the acquisition on ENGIE's non-controlling interest, which reflects the loss previously borne by ENGIE as a minority shareholder, and (ii) a 19.5 billion yen decrease in net assets.

The Company will continue to look for other operators of electricity utilities to be prospective investors in NuGen, and to consider the sale of shares of NuGen held by the Group; however, if the Group cannot find prospective investors or purchasers for the shares, or negotiation for the sale of shares faces difficulty, the Group may be required to make additional investment in NuGen, and it may affect the financial condition of the Group.

(3) Agreements regarding natural gas

The Company executed (i) the service agreements for processing liquefied natural gas (the "Service Agreements") with the companies providing services for liquefying natural gas in the U.S., and (ii) the pipeline agreements with the pipeline companies in U.S., for the purpose to sell natural gas to the users in other countries including Japan. Pursuant to these agreements, the Company will be provided the series of services. In these agreements, it is assumed that the Company will use certain amount of the liquefying ability of the companies providing services for liquefying natural gas and the pipelines of the pipeline companies for the period of twenty (20) years from 2019, and the Company has fixed service fee payment obligations to the companies providing services for liquefying natural gas and the pipeline companies, regardless of whether the Company can sell liquefied natural gas ("LNG") to the users. The Company generally expects to execute long-term transaction agreements with users with respect to the total amount of LNG the Company will obtain. The Company has already concluded basic agreements (with conditions precedent) (on volume, price and delivery terms) that cover more than 80% of the Company's liquefaction and pipeline service capacity of 2.2 million tons per year with multiple customers for certain periods of the 20-year liquefaction and pipeline contract. However, if the conditions precedent for conclusion of formal agreements are not met, the Company may not be able to sell LNG under the presently assumed conditions. The Company generally aims to execute long-term transaction agreements also with respect to the remaining portion of LNG; however, there is a possibility that the Company cannot sell LNG to the users or in the market under the conditions (including the price) the Company expects, and as a result, the Company may be forced to bear losses.

To Top

10. Past inappropriate accountings

In February 2015, the Company received an order from the Securities and Exchange Surveillance Commission, based on Article 26 of the Financial Instruments and Exchange Act, requiring submission of a report. The Company was then subject to inspection regarding projects that used percentage-of-completion accounting. Later, after establishing the Independent Investigation Committee and conducting the investigation, it was found that the Company made inappropriate accountings and, therefore, the Company filed amendments of the past Annual Securities Reports and other reports. The Tokyo Stock Exchange ("TSE") and the Nagoya Stock Exchange ("NSE") deemed that the Company had a serious problem in its internal control systems and that improvement of such internal control systems was essential, due to the fact that the Company made misstatements in such Annual Securities Reports and other reports. Therefore, in September 2015, TSE and NSE designated shares of the Company as "Securities on Alert". In September 2016, the Company submitted to stock exchanges on which the Company is listed a "Written Confirmation of Internal Management Systems" for their review. In the process of this review, TSE and NSE confirmed that measures have been implemented on a company-wide basis toward securing improvement, including review of a management policy that excessively pursued short-term profit; review of the composition of and changes to the ways in which the board of directors and the audit committee operated; and reorganization and enhancement of the functionality of divisions that are supposed to exercise monitoring functions. However, they also found that some problems related to accounting processes, etc. remained after the designation as "Securities on Alert", and that these indicate that the Company needs to implement further measures in such areas as ensuring compliance and affiliate company management. Accordingly, TSE and NSE deemed that they still need to verify the implementation and progress of such measures. As a result, the Company received in December 2016 notices from TSE and NSE to the effect that they will continue to designate the Company's shares as "Securities on Alert." On March 15, 2017, the Company's shares were designated as "Securities Under Supervision (Examination)", and on the same date, the Company resubmitted the Written Confirmation of Internal Management Systems. If, after confirmation by TSE and NSE of the resubmitted Written Confirmation of Internal Management Systems, TSE and/or NSE find that the internal control system has not been improved, the shares of the Company may be delisted, and such delisting may materially and adversely affect the Group's business, operating results and financial condition and may substantially restrict opportunities for the Company's shareholders to sell their shares.

In a class action brought against the Company as defendant in the State of California in the U.S. with respect to the Group's inappropriate accountings, an order granting a motion to dismiss was issued. However, the plaintiffs appealed such order. Several lawsuits have been initiated also in Japan, and claims for damages in a considerable amount have been made against the Company (refer to Notes to Consolidated Financial Statements, Note 24.LEGAL PROCEEDINGS). Going forward, the Company may also be sued by its shareholders and others and depending on the progress of such procedures, the Group's business, operating results and financial condition may be adversely affected. In relation to the inappropriate accountings issues, the Group was requested by the U.S. Securities and Exchange Commission ("SEC") and other parties to provide information, and the Group may be subject to other investigations by relevant authorities, including overseas authorities. If, as a result, any sanction is given to the Group, the Group's operating results and financial condition may be adversely affected. The Company was ordered to pay an administrative monetary penalty of 7,373.5 million yen by the Financial Services Agency of Japan in December 2015 with respect to the relevant inappropriate accountings issues, and completed the payment of such penalty.

To Top

11. Westinghouse Electric Company LLC

WEC entered into a share transfer agreement with Chicago Bridge & Iron Company ("CB&I"), on October 27, 2015, to acquire all the shares of CB&I's subsidiary, CB&I Stone & Webster Inc. ("S&W"), which engaged in construction and integrated services related to nuclear power plants, and acquired S&W on December 31, 2015. Up until then, WEC and S&W had created a consortium to promote construction of a total of four nuclear power plants at two project sites in the U.S. The acquisition was conducted with the intention of (i) resolving disputes and potential disputes concerns related to (a) the apportionment of cost overruns and construction delays incurred at the projects, and (b) the determination of who, the Group, the ordering parties or S&W, should bear the responsibility, and (ii) strengthening the process of obtaining increases in contract amounts and approvals for extension of time from the ordering parties, and (iii) enhancing the efficiency of construction by centrally managing the projects, thereby advancing the projects and stabilizing revenues therefrom. However, a close examination of the construction status that was conducted after the acquisition revealed that an increase in construction costs substantially more than that estimated at the time of the acquisition was necessary to complete the projects due to (i) a significant difference from the assessment assumptions at the time of the completion of the acquisition, (ii) the improvement plan for operational efficiency not having been achieved, and (iii) other factors; therefore, goodwill was recorded. Subsequently, in FY2016, the Company conducted impairment testing for the goodwill of the nuclear power systems business, and an impairment loss of goodwill of 731.6 billion yen was recorded on a consolidated basis.

On March 29, 2017, the Filing Companies filed for a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. The rehabilitation proceedings was commenced on the same day, and subsequently, under the guidance of the Bankruptcy Court, discussions among the concerned parties, including WEC, Toshiba Nuclear Energy Holdings (UK) Limited ("TNEH (UK)"), the creditors, are taking place.

Currently, WEC Group companies, including the Filing Companies, are continuing ordinary business operations, in anticipation of reorganizing their business lines under Chapter 11. The Company will continue to cooperate with the parties with all sincerity, in order to ensure smooth proceedings.

With the commencement of the rehabilitation proceedings, WEC Group has been deconsolidated from the Company's FY2016 full year business results, and the impact on the Company's FY2016 business results is a net loss of approximately 1,240.0 billion yen. In addition to the above, there are impacts as follows to the FY2016 business results as a result of commencement of the WEC Group's rehabilitation proceedings:

i. Impact from deconsolidation of WEC Group

With WEC Group being deconsolidated, causes of financial deterioration, such as goodwill impairment, were excluded; however, the Company has recorded the negative impact stemming from impairment of the total investment in WEC and TNEH (UK).

ii. Impact from provisions for the parent company guarantee and losses from loan to WEC Group

With the commencement of WEC Group's rehabilitation proceedings, the Company has recorded losses related to the parent company guarantee provided to the power utility companies for the two U.S. Nuclear Projects, and provisions for losses for credits related to WEC group. The Company has entered into an agreement with Georgia Power and other(s) for the payment of the parent company guarantee obligations that sets the maximum limit of the Company's parent company guarantee obligations at US$3.68 billion to be made in installments by January 2021, and an agreement with South Carolina Gas and Electric Company and other(s) for the payment of the parent company guarantee obligations that sets the maximum limit at US$ 2.186 billion to be made in installments by September 2022.

To Top

12. Separation of the memory business and other measures

The Company, on April 1, 2017, split off the Memory business (including its SSD business, but excluding its image sensor business) of the Storage & Electronic Devices Solutions Company, one of its in-house companies, from the Company, into Toshiba Memory Corporation ("TMC"), to provide greater flexibility in rapid decision-making and enhance financing options, which will lead to further growth of the Memory business. When separating the Memory business, the Company, bearing in mind the losses stated in "11. Westinghouse Electric Company LLC" above, considered a restructuring with third-party capital, including the potential sale of a majority stake in TMC, as part of an effort to enhance the financial structure of the Group; however, if such capital participation is not available in a timely manner, under desired terms and conditions, it is possible that the Company may not be able to enhance the financial structure of the Group in the manner anticipated. Further, depending on the identity of the party making the capital investment and the terms and conditions of the capital alliance, it is possible that the degree of freedom of TMC's business might be restricted, such as restrictions on an alliance/collaboration with the party's competitors, which might negatively affect the Group's performance and financial status. SanDisk LLC ("SanDisk"), a business partner in the memory business (a subsidiary of Western Digital Corporation, which purchased SanDisk) filed a petition with the International Court of Arbitration to obtain an injunction against the bidding processes, asserting that the Company's transfer of its stake in the joint venture to TMC without SanDisk's consent is a breach of the contractual terms of the joint venture agreement entered into between the Company and SanDisk. Furthermore, in the interim, SanDisk filed a motion for preliminary injunctive relief with the Superior Court of California to prohibit the Company from transferring its stake in the joint venture to a third party without SanDisk's agreement prior to the issuance of the arbitral award. In order to eliminate the grounds for the arbitration claim asserted by SanDisk, the Company bought back the joint venture stake held by TMC. However, depending on the decision(s) of the California Superior Court and/or the International Court of Arbitration, there is a possibility that such capital participation may not take place in a timely manner under the terms and conditions desired by the Company.

Additionally, the Company has conducted company splits, other than TMC, for purposes such as to enhance the financial structure of the Group, or to maintain the special construction business license under the Construction Business Act; however, it is possible that some of such company splits may not be implemented as scheduled, and/or that they may not bear the anticipated effects.

To Top

13. Important factors as a going concern

Although, since FY2015, the Group decided to force through a structural reform in unprofitable businesses and has implemented asset sales and other measures, the Group recorded a net loss attributable to shareholders of the Company of 965.7 billion yen, due to a loss (net loss attributable to shareholders of the Company from discontinued business) of 1,242.8 billion yen generated in WEC Group. A net loss attributable to shareholders of the Company of 460.0 billion yen was recorded in FY2015. As a result, consolidated equity attributable to shareholders of the Company decreased to -552.9 billion yen, with consolidated net assets of -275.7 billion yen as of March 31, 2017.

In connection with this, on December 28, 2016, the rating agencies downgraded the Company's credit rating causing a breach of financial covenants in outstanding syndicated loans of 257.7 billion yen arranged by the Company's main financial institutions (included in "the Short-term borrowings and current portion of long-term debt" in the consolidated balance sheet). The syndicated loan is recorded as a part of the Group's total short-term and long-term borrowings of 1,203.8 billion yen in the consolidated balance sheet as of March 31, 2017. As of August 10, 2017, the repayment of these loans can be accelerated if requested by the financial institutions. If the repayment of these loans is accelerated, the repayment of other bonds and certain borrowings may be accelerated as well.

Taking into consideration of the expenditures which the Company may pay related to nuclear power construction by WEC, its U.S. subsidiaries and affiliates, it is anticipated that the Company's liquidity will be significantly impacted.

In addition to the foregoing, as stated in "(v) Shareholders' equity and net assets," under "(7) Financial risk," under "2.Risks related to financial condition, results of operations and cash flow" above, if the Company is unable to renew the special construction business license, there will be negative impacts on business execution.

For the reasons stated above, there are material events and conditions that raise the substantial doubt about the Company's ability to continue as a going concern. The Company will take every measure toward resolving this situation, as stated in "3 Proposed measures for eliminating major risk factors stated under Risk Factors Relating to the Group and its Business," under "VII Analysis of Financial Condition, Results of Operations and Cash Flow" above.

To Top

14. Others

(1) Measures against counterfeit products

While the Group protects and seeks to enhance the value of the Toshiba brand, counterfeit products created by third parties are found worldwide. While the Group makes every effort to prevent counterfeit products, the heavy circulation of counterfeit products may dilute the value of the Toshiba brand, and the Group's net sales may be adversely affected.

(2) Protection of intellectual property rights

The Group makes every effort to secure intellectual property rights. However, in some regions, it may not be possible to secure sufficient protection.

The Group uses the intellectual property of third parties pursuant to licenses. It is possible that the Group may fail to receive the necessary third-party licenses for new technology or is unable to obtain the renewal of existing licenses or receives them on unfavorable terms.

In the past, law suits or similar actions or proceedings have been brought against the Group in respect of intellectual property rights, and the Group has filed lawsuits in order to protect its intellectual property rights. Such lawsuits and actions may be brought against the Group or the Group may file lawsuits against infringing third parties in the future.

Such lawsuits may require time, costs and other management resources, and depending on the outcome of these lawsuits, the Group may not be able to use important technology, or the Group may be found to be liable for damages.

In addition, there are products for which the Company has granted use of the Toshiba trademark, etc. to companies outside the Group. Under the license agreement, the licensee is liable for any loss attributable to the products. However, there is a possibility that the Company may incur liability from claims made by third parties, who suffered losses attributable to the products, or suffer reputational harm with regard to the quality of the Group's products.

(3) Political, economic and social conditions

The Group undertakes global business operations. Any changes in political, economic, and social conditions and policies, legal or regulatory changes, including rules and regulations concerning investment, repatriation of profits, export and import controls, foreign exchange, and taxation, and exchange rate fluctuations, in Japan or overseas, may adversely impact market demand and the Group's business operations.

(4) Natural disasters

Most of the Group's Japanese production facilities are located in the Keihin region of Japan, which includes Tokyo, Kawasaki City, Yokohama City and the surrounding area, while key semiconductor production facilities are located in Kyushu, Tokai, Hanshin, Hokuriku and Tohoku. The Group is currently expanding its production facilities in Asia. As a result, any occurrence of a wide-scale disaster, strike, terrorism or epidemic illness, such as a new type of flu, particularly in any of these areas could have a significant adverse effect on the Group's results.

Additionally, large-scale disasters, such as earthquakes, floods or typhoons, in regions where production or distribution sites are located may damage or destroy production capabilities, suspend procurement of raw materials or components, and cause transportation and sales interruptions or other similar disruptions, which could adversely affect asset value and production capabilities significantly. In the past, the businesses of the Group were affected to a certain extent by the Great East Japan Earthquake and the floods in Thailand and India.

This Web site contains projections of business results, statements regarding business plans and other forward-looking statements. This information is based on certain assumptions, such as the economic environment, business policies and other factors, as of the date when each document was posted. Actual results may differ significantly from the estimates listed here.

Related Information

Stock ChartA separate window will open.

Stock chart
@Euroland > Terms of useA separate window will open.