- Annual Report 2012 >
- Management's Discussion and Analysis
The Great East Japan Earthquake that occurred in March 2011, damaging floods in Thailand from July 2011, and other unprecedented disasters directly and indirectly affected the procurement and production operations of the Konica Minolta Group (the Group) by disrupting supply chains in the related industries.
Regarding macroeconomic circumstances in Japan and overseas, increasing economic uncertainty in Europe as a result of the sovereign debt crisis and its potential impact on the global economy were cause for concern. However, the U.S. economy was relatively solid and the economies of emerging countries including China maintained high growth rates overall. Economic conditions remained challenging in Japan, especially for export-oriented manufacturers, because of the rapid appreciation of the yen, the impact of the earthquake in Japan and the flooding in Thailand.
Net Sales
In the fiscal year ended March 31, 2012, net sales decreased ¥10.0 billion, or 1.3%, year on year to ¥767.8 billion. Amid the Great East Japan Earthquake, flooding in Thailand, the recession in Europe and other factors, the Group implemented initiatives such as introducing new products, acquiring large customers, and strengthening sales in emerging countries. However, currency translation reduced net sales by ¥29.7 billion.
Operating Income
Gross profit increased ¥0.7 billion, or 0.2%, year on year to ¥355.3 billion. Although net sales decreased and procurement costs rose while orders stagnated as a result of the Great East Japan Earthquake and the flooding in Thailand, sales of main products increased and the entire Group worked to reduce costs and raise productivity. As a result of these and other factors, the gross profit margin improved 0.7 points year on year to 46.3 percent.
Selling, general and administrative (SG&A) expenses increased ¥0.4 billion year on year as assiduous efforts to reduce SG&A expenses offset increased expenses due to aggressive mergers and acquisitions.
As a result of the above, operating income increased ¥0.3 billion, or 0.8%, year on year to ¥40.3 billion. Excluding a decrease of ¥7.4 billion due to currency translation, operating income would have increased 19.3% year on year.
Income before Income Taxes and Minority Interests
Income before income taxes and minority interests increased ¥4.7 billion, or 16.7%, year on year to ¥32.8 billion. Gain on reversal of foreign currency translation adjustment of ¥3.7 billion partially offset foreign exchange loss, net of ¥2.5 billion, write-down of investment securities of ¥2.7 billion, and business structure improvement expenses of ¥1.1 billion.
Net Income
Net income decreased ¥5.4 billion, or 21.1%, year on year to ¥20.4 billion. Among other factors, revision of the corporate tax rate in Japan increased income taxes and reduced net income by ¥3.3 billion.
Business Technologies Business
In the office field, overall sales volume of the A3 multi function peripherals (MFPs) of the bizhub series for the fiscal year ended March 31, 2012 increased year on year, reflecting stronger unit sales of color MFPs in all regions – Japan, the United States, Europe, and other regions including Asia – and level sales volume of monochrome MFPs. The Company enhanced its global sales system based on the concept of Optimized Print Services (OPS), a growth strategy that aims at providing optimal printing environments to customers. Sales to major global accounts increased steadily as a result. For example, the Company successfully concluded multi-year global contracts with BMW AG, a major European automobile manufacturer headquartered in Germany, and the National Aeronautics and Space Administration (NASA) for the management and maintenance of office equipment at their offices. The Company also acquired IT service providers to strengthen its IT service capability, which is key to expanding service businesses in the future and achieving sustainable growth. In Europe, the Company acquired Sweden-based Koneo AB in April 2011. In the United States, California-based subsidiary All Covered Inc., which became a member of the Group in December 2010, acquired nine companies including Illinois-based Techcare LLC. The effective date for the acquisition of two of these companies was April 1, 2012. With these initiatives, the Company expanded its IT service network in North America and European markets. In addition, the Company launched two new color MFPs, bizhub C754 and C654, as the highest-end products in the bizhub series in January 2012 to enhance its product competitiveness in this field.
In the production print field, sales volume of color equipment for production printing systems for the fiscal year ended March 31, 2012 increased significantly year on year in all regions – Japan, the United States, Europe, and other regions including Asia. This performance reflected strong sales of three new color digital printing systems, the bizhub PRESS C8000, C7000 and C6000, which were launched in autumn 2010 and are used in in-house printing and digital commercial printing. Sales of monochrome MFPs also increased year on year, especially in overseas markets. Consequently, overall sales in this field remained robust throughout the fiscal year ended March 31, 2012.
As a result, Business Technologies Business segment sales to outside customers increased 1.5% year on year to ¥547.5 billion. Excluding a decrease of ¥24.4 billion in sales due to the effect of the strong yen on currency translation, segment sales would have increased about 6.0% year on year. Segment profit increased 5.4% year on year to ¥39.4 billion. During the fiscal year ended March 31, 2012, large-scale natural disasters such as the Great East Japan Earthquake and flooding in Thailand caused difficulties in procuring certain materials and components. The Company took steps to minimize the effect on sales by strengthening cooperation among its development, procurement, and production divisions. As a result, both segment sales and segment profit increased year on year despite the strong yen.
Optics Business
In the display materials field, the Group introduced new cellulose triacetate films for increasing viewing angle (VA-TAC film) from early 2012. Sales of VA-TAC films remained favorable in Korea and Taiwan during the fiscal year ended March 31, 2012 despite widespread production adjustments in the liquid crystal display (LCD) industry from summer 2011. In addition, adoption of thin plain TAC films, a strong Group product, increased steadily. As a result, overall TAC film sales volume for the fiscal year ended March 31, 2012 increased year on year.
In the memory devices field, sales volume of glass substrates for hard disk drives (HDDs) was level year on year, reflecting production adjustments adopted by personal computer manufacturers in the first half of the fiscal year and the effects of damage certain HDD set manufacturers suffered due to the flooding in Thailand in the second half. Sales volume of pickup lenses for optical disks for the fiscal year ended March 31, 2012 decreased year on year because the markets for both Blu-ray DiscsTM and DVDs failed to recover.
In the image input/output components field, sales of lens units for digital and video cameras had been rebounding but stalled because of stagnant orders from certain customers that were affected by the flooding in Thailand. Sales volume only increased slightly year on year as a result. Meanwhile, sales volume of optical units for cell phones with cameras increased year on year, with increased use of Konica Minolta optical units in the second half compensating for a weak first half.
As a result, Optics Business segment sales to outside customers decreased 4.3% year on year to ¥124.3 billion. Segment profit increased 9.6% year on year to ¥14.0 billion because increased sales of main products and initiatives to reduce costs and expenses compensated for the decrease in segment profit from lower sales and prices for certain products.
Healthcare Business
In the Healthcare Business, the Company launched two models of digital medical input equipment, the AeroDR cassette digital X-ray detector and the REGIUS Σ desktop computed radiography (CR) unit, in the first half, and expanded its lineup with a mobile digital radiography (DR) unit for hospital rounds in the second half. The Company also continued to expand the areas in which it sells to medical facilities in Japan and abroad. Digital equipment sales volume increased year on year because the Company concentrated on increasing sales of AeroDR in the hospital market and REGIUS Σ in the clinic market. In film products, the Company concentrated on China to expand sales in emerging economies. However, the use of filmless equipment in Japan and other developed countries increased unabated, causing film product sales volume for the fiscal year ended March 31, 2012 to decreased year on year.
In addition to the above, the impact of the strong yen and lower market prices caused Healthcare Business segment sales to outside customers to decrease 14.1% year on year to ¥73.0 billion. Segment profit decreased 46.9% year on year to ¥90 million, with the impact of lower sales and the surge in the price of silver partly offset by moves to reduce costs and expenses.
Cash Flows from Operating Activities:
Net cash provided by operating activities was ¥72.3 billion, compared with ¥67.9 billion for the previous fiscal year. Income before income taxes and minority interests provided cash of ¥32.8 billion. Depreciation and amortization totaled ¥49.2 billion, and amortization of goodwill totaled ¥8.8 billion. Uses of cash included an increase in working capital of ¥4.9 billion and income taxes paid of ¥6.1 billion.
Cash Flows from Investing Activities:
Net cash used in investing activities was ¥42.7 billion, compared with ¥44.7 billion for the previous fiscal year. Payment for acquisition of property, plant, and equipment used cash of ¥29.1 billion. Principal investments included molds for new products in the Business Technologies Business and capital expenditure in the Optics Business. Other uses of cash included ¥5.5 billion for payment for acquisition of newly consolidated subsidiaries and ¥2.3 billion for payment for transfer of business, both of which were associated with the acquisition of companies in Europe and the United States to strengthen IT services and direct sales in the Business Technologies Business.
As a result, free cash flow, calculated as the sum of cash flows from operating and investing activities, was ¥29.6 billion, compared with free cash flow of ¥23.2 billion for the previous fiscal year.
Cash Flows from Financing Activities:
Net cash provided by financing activities was ¥26.3 billion. In the previous fiscal year, financing activities used net cash of ¥12.9 billion. Proceeds from issuance of bonds provided cash of ¥40.0 billion, and net proceeds from long-term loans payable provided cash of ¥12.4 billion. Uses of cash included net decrease in short-term loans payable of ¥16.4 billion and cash dividends paid of ¥7.9 billion.
Total capital expenditure(CAPEX) for the fiscal year ended March 31, 2012 decreased ¥8.9 billion, or 20.8%, year on year to ¥34.0 billion. By business segment, capital expenditure totaled ¥17.7 billion in the Business Technologies Business, ¥6.6 billion in the Optics Business, ¥2.3 billion in the Healthcare Business, and ¥7.2 billion in other businesses. Principal capital expenditure for the fiscal year ended March 31, 2012 included investment in molds for new products in the Business Technologies Business, and investment to increase production capacity in the Optics Business. Depreciation decreased ¥5.8 billion, or 10.7%, year on year to ¥49.2 billion, largely reflecting progress in depreciation of production facilities.
Research and development (R&D) costs decreased 0.1% year on year to ¥72.5 billion due to investment in the Business Technologies Business and future growth businesses. By business segment, R&D costs increased 2.4% year on year to ¥44.1 billion in the Business Technologies Business, decreased 1.1% to ¥10.2 billion in the Optics Business, decreased 31.5% to ¥4.9 billion in the Healthcare Business, and increased 10.8% to ¥13.1 billion in other businesses.
Assets
Current assets at March 31, 2012 increased ¥64.0 billion, or 12.8%, from a year earlier to ¥565.9 billion. Cash on hand and in banks increased ¥2.7 billion, short-term investment securities increased ¥54.0 billion, and notes and accounts receivable-trade increased ¥10.8 billion. Deferred tax assets decreased ¥10.2 billion.
Property, plant and equipment as of March 31, 2012 decreased ¥11.7 billion from a year earlier to ¥178.9 billion due to normal depreciation. Intangible assets decreased ¥1.0 billion from a year earlier to ¥87.3 billion due to amortization despite increased goodwill as a result of business acquisitions in the Business Technologies Business.
Investments and other assets as of March 31, 2012 increased ¥5.2 billion from a year earlier to ¥69.7 billion. Investment securities decreased ¥1.8 billion from a year earlier largely because of reduced book value due to lower stock prices. However, deferred tax assets increased ¥7.8 billion from a year earlier.
As a result of these factors, total assets at March 31, 2012 increased ¥56.5 billion, or 6.7%, from a year earlier to ¥902.0 billion.
Liabilities
Current liabilities at March 31, 2012, decreased ¥13.5 billion from a year earlier. Notes and accounts payable-trade increased ¥13.4 billion, while the total of short-term debt and the current portion of long-term debt decreased ¥29.6 billion.
Long-term liabilities at March 31, 2012 increased ¥64.1 billion from a year earlier because bonds payable increased ¥40.0 billion due to the issue of bonds and long-term loans payable increased ¥24.9 billion.
As a result of the above, total liabilities as of March 31, 2012 increased ¥50.5 billion, or 12.1%, from a year earlier to ¥467.0 billion.
Interest-bearing debt as of March 31, 2012 increased ¥35.3 billion from a year earlier to ¥227.9 billion.
Net Assets
After net income of ¥20.4 billion and dividend payments of ¥7.9 billion, retained earnings at March 31, 2012 increased ¥11.3 billion from a year earlier to ¥222.8 billion. On the other hand, foreign currency translation adjustments reduced net assets by an additional ¥6.0 billion compared with a year earlier due to the higher yen.
As a result of the above, net assets at March 31, 2012 increased ¥5.9 billion, or 1.4%, from a year earlier to ¥434.9 billion.
At March 31, 2012, the equity ratio decreased 2.5 percentage points from a year earlier to 48.1%.
Basic Dividend Policy
The Company considers distribution of earnings to shareholders a management priority under a basic policy of sustained distribution of earnings to shareholders after comprehensive consideration of factors including consolidated results and strategic investment in growth areas. The Company's specific medium-to-long-term benchmark for dividends is a consolidated payout ratio of 25% or higher. The Company also considers factors such as financial position and share price in making decisions about share repurchases as another means of distributing earnings to shareholders.
Dividends for the Fiscal Year Ending March 31, 2012 and Planned Dividends for the Fiscal Year Ending March 31, 2013
Increasing market competition and the appreciation of the yen during the fiscal year ended March 31, 2012, along with production adjustments among customers and two major natural disasters that impacted supply chains, created continued challenging conditions for sales. However, increased sales of profitable core products and thorough cost controls enabled the Group to generally achieve its earnings targets from operating income to net income. Based on these circumstances, the Company declared a year-end cash dividend of ¥7.50 per share. In conjunction with the interim cash dividend, cash dividends per share for the year ended March 31, 2012 totaled ¥15.00.
While the operating environment remains uncertain, for the fiscal year ending March 31, 2013, the Company assumes it will achieve its performance targets and therefore plans to pay an interim and a year-end cash dividend per share of ¥7.50 each for total annual dividends of ¥15.00 per share.
Looking at the global economic conditions surrounding the Group, the outlook for the European economy remains uncertain due to its fiscal problems. We expect that the United States will grow moderately overall but will continue to expand and contract. Growth in emerging economies, especially China, India, and other Asian economies, is expected to slow, but we expect these economies to maintain higher economic growth rates than those of developed economies. The Japanese economy is expected to recover, backed by demand associated with post-earthquake reconstruction.
In the Business Technologies Business, we expect that demand for production printing products will continue to expand both in Japan and in overseas markets. We also forecast that growth in emerging markets will drive demand for office MFPs. In developed countries, we expect to boost demand from global major accounts by leveraging the development of OPS. In the Industrial Business*, prolonged adjustments of digital consumer electronics inventory, including LCD TVs, are expected to come to an end, bringing an overall recovery in demand. In the Healthcare Business, we anticipate that demand for cassette DR and compact CR will continue to expand, especially in the hospital and clinic markets.
| * | The reportable segments in the fiscal year ended March 31, 2012 were the Business Technologies Business, the Optics Business, and the Healthcare Business. However, with the reorganization of the Group in April 2012, the reportable segments will be the Business Technologies Business, the Industrial Business, and the Healthcare Business from the fiscal year ending March 31, 2013. |
Considering the above circumstances, we have made the following forecasts for the fiscal year ending March 31, 2013.
| Performance Forecast for the Fiscal Year Ending March 31, 2013 (As of July 27, 2012) |
(Billions of yen) |
|---|---|
| Net sales | 800.0 |
| Operating income | 48.0 |
| Operating income ratio | 6.0% |
| Amortization of goodwill | 8.8 |
| Operating income before amortization of goodwill | 56.8 |
| Operating income ratio before amortization of goodwill | 7.1% |
| Net income | 22.0 |
| Capital expenditure | 50.0 |
| Depreciation | 55.0 |
| Research and development costs | 73.0 |
| Free cash flow | (10.0) |
| CF from operating activities - CF from investing activities | 30.0 |
We assume exchange rates of JPY 80 to USD 1 and JPY 100 to EUR 1.
The following risks could have a significant effect on the judgment of investors in the Group. Further, the forward-looking statements in the following section are the Group's judgments as of June 21, 2012.
Economic Risks
(1) Economic Trends in Primary Markets
The Group provides MFPs, production printing equipment, image input/output components, display materials, products and equipment for use in healthcare, and related services to customers worldwide. Economic conditions in national markets significantly affect sales and earnings in these businesses.
Risks of concern in the global economy include the protracted debt problems in Europe, high crude oil prices due to political instability in oil-producing countries, and economic policy revisions in leading countries due to major elections. Japan's economy is expected to recover moderately because of the impact of reconstruction and restoration demand following the Great East Japan Earthquake and the flooding in Thailand, but conditions remain unclear. Recessions in national markets that cause customers to restrain investment, reduce operating expenses or reduce consumption could adversely affect the Group's results or finances in ways such as causing inventories to increase, reducing sales prices by increasing competition, or reducing sales volume.
(2) Changes in Exchange Rates
Overseas sales account for 72.0% of the Group's net sales. The Group operates globally and is significantly affected by exchange rate fluctuations.
The Group ameliorates the impact of exchange rates by conducting hedging transactions centered on futures contracts for major currencies including the U.S. dollar and the euro. In addition, the impact of USD-denominated procurement for the MFPs and printers the Business Technologies Business produces in China is light because it is basically offset by sales and payables in regions where sales are denominated in U.S. dollars. However, fluctuations in euro exchange rates directly impact earnings. Generally, yen appreciation versus the U.S. dollar and euro negatively affects results, while yen depreciation versus these currencies positively affects results.
The Group takes steps to ameliorate the impact of currency exchange rate fluctuations because yen appreciation negatively affects its results. However, continued yen appreciation could negatively affect the Group's results.
Industry and Business Activity Risks
(3) Competition in Technology Innovation
The ability to innovate faster than other companies is the primary source of competitive advantage in the Group's core businesses including MFPs, production printing equipment and other information equipment, TAC polarizing film for LCDs, and pickup lenses for optical disks, and in the Group's key areas for future development including organic electroluminescent (EL) lighting.
The Group continually takes on the challenge of innovative technology development and invests aggressively in R&D and facilities, but these efforts may not be timely enough. Moreover, competitors may develop similar or alternative technologies more quickly. Accurately determining new directions in technology innovation to meet customer needs is crucial, and failure to do so could reduce the Group's competitiveness in its core and new businesses.
(4) Operating Environment in the Equipment and Service Businesses
Solution and service needs are increasing in conjunction with rising demand for high-value-added products that are networked and multifunctional, including information equipment such as MFPs, printers and production printing equipment, and healthcare equipment. In addition, companies are strengthening their sales channels through acquisitions, reorganization and alliances with IT companies, particularly in the information equipment industry. Competition among manufacturers and distributors that respond to this trend is expected to further intensify competition within the industry.
The Group operates under a policy of being the genre leader in its Business Technologies Business, the Group's largest business and growth driver. The Group led the industry in concentrating resources to expand its office-use color MFP and production printing equipment businesses, thus establishing itself as the leading Group in European and North American markets. However, the Group cannot guarantee continued competitive advantage because technological innovation is rapid in this field and the importance of the solutions and services business is further increasing. Slower growth resulting from inability to maintain competitiveness in technology and sales channels in the Business Technologies Business could adversely affect the Group's results. Moreover, restrained corporate investment or cost reductions could cause installation of new MFPs to decrease, which could adversely affect the Group's results in the future.
(5) Operating Environment in the Industrial Business
The Industrial Business supplies components and materials for LCD televisions, DVD and HDD products, and other products in the digital home appliance market. Selling prices continue to trend downward due to intense competition among manufacturers in this market, which affects component and material suppliers such as the Group. At the same time, shorter product lifecycles require component and material manufacturers to sell mass-produced products in a short time. Rapid changes in supply and demand due to production adjustments caused by market competition could adversely affect the Group's results.
In addition, the Industrial Business's major customers are digital home appliance manufacturers. Rapid changes in demand or decreases in prices in addition to failure to respond sufficiently to the industry trends the Group identifies, such as global reorganization of the digital home appliance industry or next-generation products, could result in loss of customers and adversely affect the Group's results.
(6) Quality Problems
The Group has created a rigorous quality assurance system for Group companies and contract manufacturers in Japan and overseas, and provides customers with high-performance, reliable products and services. The Group could be responsible for compensation for damages that result if the Group should happen to provide defective products or services. Moreover, remedying such defects may result in significant expenses. In addition, media reports on such problems could adversely affect the Group's operations and image.
(7) Global Business Activities
The Group conducts a majority of its business outside Japan in North America, Europe, and Asian countries. These global corporate activities entail the following risks:
- Exchange rate movements
- Political and economic uncertainties
- Unanticipated changes to legal, regulatory and tax codes
- Hiring and retaining outstanding employees
- Industrial infrastructure vulnerabilities
Business expansion in overseas markets is a primary objective of the Group. However, inability to respond adequately to the risks that are characteristic of global business activities could adversely affect the Group's results and growth strategies.
The Group is concentrating on expanding production in China to enhance cost competitiveness in its core Business Technologies Business and Industrial Business. The Business Technologies Business has established production bases in Dongguan, Shenzen and Wuxi that produce and ship nearly all of the MFPs and printers it sells globally. In addition, the Industrial Business has established production bases in Dalian and Shanghai that produce image input/output components and other products.
China continues to develop economically and make progress in areas such as improving its legal system and upgrading infrastructure. However, legal changes, labor policy difficulties, increased personnel expenses, appreciation of the Chinese yuan, changes in import and export regulations and the tax code, and other developments that are difficult to anticipate may occur. Inability of the Group to effectively handle the risks inherent in having a large percentage of the manufacturing activities of its core businesses in China could adversely affect the Group's results and growth strategies.
(8) Securing Human Resources
Skilled human resources are the source of growth for the Group. The Group increasingly requires outstanding engineers and highly skilled workers who can further develop core technologies in businesses including optics, materials, precision processing, and imaging in order to maintain the Group's high level of competitiveness in the future. In addition, prevailing over competitors as digitalization and networking advance requires the Group to secure outstanding engineers and systems engineers to quickly strengthen information and communication technologies such as software and control technologies. Beyond technology, the Group has a growing need for personnel in areas such as marketing, sales and service to create new sources of earnings from businesses including solutions and services.
While these personnel requirements are pronounced, competition among companies acquire human resources is intense. Inability to recruit and retain competent human resources could adversely affect execution of the Group's growth strategy.
(9) Alliances with Other Companies
The Group is enhancing competitiveness and efficiency by collaborating with other companies through means including technology and business alliances and joint ventures.
In the Business Technologies Business, the Group moved to enhance its IT services by continuing to make acquisitions in North America and Europe during the fiscal year ended March 31, 2012 that strengthened its business base. In the production print business, the Group responded to diversifying needs in the commercial printing market by concluding a global sales agreement in the commercial printing market in February 2012 with Japan-based Komori Corporation. In May 2012, the Group also acquired FedEx Kinko's Japan Co., Ltd. to provide various solutions in the corporate in-house printing market. The Group will continue to forge alliances and make acquisitions as a strategic growth option.
Mutually supplementing technology and expertise under agreements with other companies strongly helps the Group to provide new products and services that respond to customer needs in a timely manner. Inability to continue collaborative relationships for operating, financial or other reasons or inability to achieve the expected outcomes of such relationships could adversely affect the Group's growth strategy.
(10) Rising Raw Material Prices
Rising prices for metal products including silver, steel and aluminum; petrochemical products made from crude oil; and other raw materials that the Group uses in its production activities could affect the Group's results. The Group works to reduce costs and raise the prices of its products as raw material prices rise, but cannot guarantee that it will be able to completely compensate higher raw material prices. Raising product selling prices may also reduce sales volume.
(11) Raw Material and Resource Procurement
The Group procures specified products, components and materials from external suppliers. Unanticipated contingencies among these suppliers could adversely affect the Group's production and supply capabilities.
In addition, the limited supply of scarce natural resources such as rare earths remains a concern. While the Group is working to reduce the amount used and find alternatives for these scarce resources, supply disruptions could interfere with production continuity and adversely affect the Group's results.
Legal and Litigation Risk
(12) Intellectual Property
The Group accumulates differentiating technologies and expertise in the course of product development to ensure the competitiveness of its businesses, and works to protect these intellectual property rights. However, legal constraints in certain regional areas may preclude full protection of intellectual property and render the Group unable to prevent third parties from manufacturing and selling products that employ the Group's intellectual property.
Furthermore, the Group tries to avoid infringing on the rights of other companies in developing products. However, differences of opinion or other factors may result in the assumption that the Group is infringing on the rights of other companies, which could render the Group unable to use important technologies or make the Group responsibile for paying significant monetary compensation.
Furthermore, in the future the Group may be prohibited from using intellectual property rights it currently licenses from third parties, or such use may be subject to unreasonable conditions.
(13) Healthcare Systems
The Group's Healthcare Business is subject to the ongoing influence of the healthcare systems and approval processes of the countries in which it operates. Factors including healthcare system reform could result in significant and unanticipated changes healthcare administration policy. Inability to respond quickly to changes in the operating environment in the Healthcare Business could adversely affect the Group's results.
(14) Environmental Regulations
The Group is subject to various environmental laws and regulations governing issues including air pollution, water pollution, removal of hazardous substances, waste treatment, product recycling, and soil and groundwater contamination. The Group may incur expenses and financial liabilities for environmental obligations associated with past and present manufacturing activities. In addition, the Group may incur additional compliance obligations and expenses if environmental laws and regulations become more rigorous in the future, which could adversely affect the Group's results.
(15) Information Leaks
The Group obtains personal and confidential information on customers and business partners in the course of operations. The Group has a system for managing this information and implements measures including employee training, but unexpected contingencies could cause this information to leak externally. This could expose the Group to liability for damages to injured parties, and could adversely affect the Group's credibility and image.
In addition, leakage of the Group's confidential information related to matters including technology, contracts and personnel could adversely affect the Group's results.
Disasters and Other Risks
(16) Disasters
The Group centers on a holding company, Konica Minolta Holdings, Inc., and operates globally. It encompasses bases worldwide involved in activities including R&D, procurement, production and sales. Disasters including earthquakes, fires, typhoons or flooding; pandemics similar to the outbreak of H1N1 influenza; or war, acts of terrorism or computer viruses could damage the Group's facilities, temporarily halt operations or delay production and shipments. Such disasters could also disrupt or restrict use of essential utilities such as electricity, gas and water; cause supply shortages of components and raw materials by damaging suppliers; halt distribution; or disrupt markets. Such circumstances could reduce net sales below initial plans, incur significant expenses to restore damaged facilities, or have other outcomes that could adversely affect the Group's results.
The Group essentially resolved the component and raw material procurement problems caused by the Great East Japan Earthquake by the end of the second quarter of the fiscal year ended March 31, 2012. Moreover, the flooding in Thailand did not directly affect Group operations because the Group does not have a production base there. However, the Group has experienced increased procurement costs, suspended orders and other issues resulting from supply chain disruptions caused by the flooding. In the future, the impact of disasters on suppliers or customers or the impact of issues such as electricity shortages could adversely affect the Group's results.
(17) Impairment of Long-Lived Assets
Effective the fiscal year ended March 31, 2006, the Group adopted accounting standards for impairment of long-lived assets including property, plant, equipment and goodwill. The Group periodically evaluates the carrying value of long-lived assets on the consolidated balance sheets to determine if their residual value is recoverable with expected future cash flows from the asset. The Group recognizes impairment when the asset no longer generates sufficient cash flow because its operating profitability has decreased due to competition or other reasons, which could adversely affect the Group's results.