Annual Report 2012


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BUSINESSRISKSTHE“K”LINEGROUPISDEVELOPINGITSBUSINESSINTERNATIONALLY.WHENUNPREDICTABLEEVENTSOCCUR,WHETHERTHEYARECAUSEDBYSOCIOPOLITICALORNATURALPHENOMENA,THEYCANHAVEANEGATIVEIMPACTONBUSINESSINRELATEDAREASANDMARKETS.FURTHERMORE,INTHEGROUP’SMAINBUSINESSfiELD,MARINETRANSPORT,MARKETCONDITIONSFORCARGOHANDLINGANDMARINETRANSPORTATIONAREHEAVILYINflUENCEDBYINTERNATIONALFACTORSSUCHASECONOMICTRENDSINVARIOUSCOUNTRIES,PRODUCTMARKETCONDITIONS,SUPPLYANDDEMANDBALANCEFORSHIPS,ASWELLASCOMPETITIVERELATION-SHIPS.CHANGESINANYOFTHOSEFACTORSCANHAVEANEGATIVEIM-PACTONTHE“K”LINEGROUP’SMARKETINGACTIVITIESANDBUSINESSRESULTS.INPARTICULAR,ACHANGEINTAXSYSTEMSORECONOMICPOLI-CIES,ORANINVOCATIONOFPROTECTIVETRADEPOLICIESINMAJORTRAD-INGREGIONSANDCOUNTRIESLIKENORTHAMERICA,EUROPE,JAPAN,CHINAANDSOONCANRESULTINADECREASEINSHIPPINGVOLUMEANDWORSENCONDITIONSFORTHEFREIGHTMARKET.THISCANHAVEASERIOUSIMPACTONTHE“K”LINEGROUP’SfiNANCIALSITUATIONANDOPERATINGRESULTS.OTHERMAJORRISKSTHATCANHAVEANEGATIVEIMPACTONTHE“K”LINEGROUP’SBUSINESSACTIVITIESINCLUDETHEFOLLOWING:1.RATEFLUCTUATIONSALARGEPERCENTAGEOFTHE“K”LINEGROUP’SBUSINESSEARNINGSCOMEINREVENUEDENOMINATEDINU.S.DOLLARS.THEREVENUESASCONVERTEDTOJAPANESEYENCANTHEREFOREBENEGATIVELYAFFECTEDBYflUCTUATIONSINEXCHANGERATES.THEGROUPWORKSTOMINIMIZENEGATIVEIMPACTSFROMEXCHANGERATEflUCTUATIONSBYINCURRINGCOSTSINDOLLARSANDCREATINGCURRENCYHEDGES,BUTASTRONGERYENAGAINSTTHEU.S.DOLLARCANSTILLHAVEANEGATIVEINflUENCEONTHE“K”LINEGROUP’SfiNANCIALSITUATIONANDOPERATINGRESULTS.2.FUELOILPRICEFLUCTUATIONSFUELOILPRICESACCOUNTFORAMAJORPORTIONOFTHE“K”LINEGROUP’SSHIPOPERATIONCOSTS.FLUCTUATIONSINFUELOILPRICESAREINflUENCEDMAINLYBYFACTORSWITHWHICHTHE“K”LINEGROUPHASNOINflU-ENCE,SUCHASCRUDEOILSUPPLYANDDEMANDBALANCE,PRODUCTIONANDPRICINGPOLICIESADOPTEDBYOPECANDOTHEROIL-PRODUCINGNATIONS,ASWELLASPOLITICALCONDITIONSANDflUCTUATIONSINOILPRO-DUCTIONPERFORMANCEINPRODUCINGCOUNTRIES.SUCHFACTORSAREEXTREMELYDIFfiCULTTOPREDICT.THEGROUPUTILIZESFUTURESCONTRACTSINORDERTOMITIGATETHEIMPACTOFUNSTABLEELEMENTSONITSBOT-TOMLINE,BUTREMARKABLEANDSUSTAINEDRISESINFUELOILPRICESALONGWITHDECREASEDSUPPLIESCANFORCETHE“K”LINEGROUP’SBUSINESSCOSTSUPWARDS.THISWOULDHAVEANEGATIVEIMPACTONTHEGROUP’SfiNANCIALSITUATIONANDOPERATINGRESULTS.3.INTERESTRATEFLUCTUATIONSTHE“K”LINEGROUPCARRIESOUTONGOINGCAPITALINVESTMENTINITSSHIPBUILDINGSANDSOON.THEGROUPSTRIVESTOREDUCEINTEREST-BEARINGDEBTTOTHEGREATESTEXTENTPOSSIBLEBYINVESTINGITSOWNCAPITALANDENGAGINGINOFF-BALANCESHEETDEALSSUCHASOPERAT-INGLEASES,BUTINAHIGHPERCENTAGEOFCASES,STILLMUSTRELYONBORROWINGFROMfiNANCIALINSTITUTIONS.INADDITION,WEAREINVESTINGINTHEWORKINGCAPITALNEEDEDTOCARRYOUTOURBUSINESSOPERA-TIONS.WITHREGARDTOCAPITALPROCUREMENT,WEARETAKINGOUTLOANSABOVEACERTAINSCALEATfiXEDINTERESTRATESANDALSOUSINGINTERESTRATESWAP(SWAPINTOfiXEDRATE)FORCAPITALINVESTMENTSHIPSANDEQUIPMENT,BUTTHERISEINFUTUREINTERESTRATESHASLEDTOANINCREASEINTHECOSTOFCAPITALPROCUREMENT,ANDTHISCANHAVEANEGATIVEIMPACTONTHE“K”LINEGROUP’SfiNANCIALSITUA-TIONANDOPERATINGRESULTS.4.PUBLICREGULATIONSMARINETRANSPORTATIONBUSINESSINGENERALISINflUENCEDBYINTERNA-TIONALTREATIESONSHIPOPERATIONS,REGISTRATIONANDCONSTRUCTION,ASWELLASBUSINESSLICENSING,TAXESANDOTHERLAWSANDREGULATIONSINVARIOUSINDIVIDUALCOUNTRIESANDTERRITORIES.ITISPOSSIBLETHATINTHEFUTURE,NEWLAWSORREGULATIONSWILLBEENACTEDTHATCONSTRAINTHE“K”LINEGROUP’SBUSINESSDEVELOPMENTORINCREASEITSBUSINESSCOSTS.THISWOULDRESULTINANEGATIVEIMPACTONTHE“K”LINEGROUP’SfiNANCIALSITUATIONANDOPERATINGRESULTS.SHIPSTHATTHE“K”LINEGROUPOPERATESAREMANAGEDANDOP-ERATEDINCOMPLIANCEWITHEXISTINGLAWSANDREGULATIONS,ANDTHEYCARRYAPPROPRIATEHULLINSURANCE.NEVERTHELESS,RELEVANTLEGALREGU-LATIONSCOULDCHANGE,ANDCOMPLIANCEWITHNEWREGULATIONSCOULDGENERATEADDITIONALCOSTS.5.SERIOUSMARINEINCIDENTS,ENVIRONMENTALDESTRUCTION,CONflICTS,ETC.THE“K”LINEGROUPREGARDSTHOROUGHLYSAFESHIPOPERATIONANDENVIRONMENTALPRESERVATIONASITSHIGHESTPRIORITIESASITMAINTAINSANDIMPROVESITSSAFEOPERATIONSTANDARDSANDCRISISMANAGE-MENTSYSTEM.IFANACCIDENT,ESPECIALLYANACCIDENTINVOLVINGANOILSPILL,SHOULDOCCURDESPITETHESEEFFORTSANDCAUSESOCEANPOLLUTION,ITCOULDHAVEANEGATIVEIMPACTONTHE“K”LINEGROUP’SfiNANCIALSITUATIONANDOPERATINGRESULTS.FURTHERMORE,INCREASINGLOSSESDUETOPIRACY,OPERATIONINAREASOFPOLITICALINSTABILITYORCONflICTANDTHEINCREASINGRISKOFTERRORISMDIRECTEDATSHIPSCOULDCAUSEMAJORDAMAGETO“K”LINEGROUPSHIPSANDPLACEITSCREWSINDANGER.THESEFACTORSCOULDHAVEANEGATIVEIMPACTONTHE“K”LINEGROUP’SSAFESHIPOPERATIONS,VOYAGEPLANNINGANDMANAGEMENTASWELLASMARINETRANSPORTBUSINESSASAWHOLE.6.COMPETITIVEENVIRONMENT,ETC.THE“K”LINEGROUPCARRIESOUTBUSINESSDEVELOPMENTINTHEIN-TERNATIONALMARINETRANSPORTATIONMARKET.INITSCOMPETITIVERELA-TIONSHIPSWITHLEADINGGROUPSOFMARINETRANSPORTATIONCOMPA-NIESFROMJAPANANDABROAD,THEGROUP’SINDUSTRYPOSITIONANDOPERATINGRESULTSCANBENEGATIVELYIMPACTEDBYTHEDEGREETOWHICHOTHERCOMPANIESALLOCATETHEIRMANAGEMENTRESOURCESTO44ANNUALREPORT2012


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