Risks in business operations and other

UT Group faces the following risk factors which may affect its business performance, financial positions, and investors’ decision making. Please be noted that the risks and uncertainties are not limited to the following risks.

Group-wide risks

1.

Dependence on specific industries

UT Group’s major clients are semiconductor-related and electronics-related manufacturers, which represent approximately 40% of our sales. We utilize our expertise that has been accumulated in the semiconductor-related and electronics-related sectors to expand into the focused areas of the automobile and other sectors, and diversify business fluctuation risks. However, the semiconductor-related and electronics-related sectors tend to be prone to the influence of economic conditions, making it difficult to sustain a stable trend in sales, or to avoid a rapid change in sales.

2.

Increasing competition in the industry

UT Group is engaged in the manufacturing outsourcing and engineer dispatch industries, where companies are strengthening sales efforts and aiming for scale expansion through M&A activities. We also aim to increase our share of business with existing clients, develop new clients, and aggressively expand operations by acquiring businesses in the same industry. However, there is a possibility that intensified competition may not allow us to make progress as smoothly as expected.

3.

Risks in licensing

UT Group holds licensing from Japan’s Minister for Health, Labour, and Welfare (MHLW) for business of general worker dispatch, based on the Worker Dispatching Act and for business of fee-charging employment placement, based on the Employment Security Act. The Worker Dispatching Act stipulates that, with the aim of ensuring appropriate management of the worker dispatching business, the license can be revoked or a part or the entire business can be suspended if the dispatching company falls under the causes of disqualification (Worker Dispatching Act; Article 6) or the causes of rescission of the license (Worker Dispatching Act; Article 14). The Employment Security Act also stipulates that the license can be revoked or a part or the entire business can be suspended if the fee-charging employment placement company falls under the causes of disqualification (Employment Security Act; Article 32) or the causes of rescission of the license (Employment Security Act; Article 32-9). We operate business properly in compliance with laws and regulation. However, in case of a serious breach of law, which results in the rescission of the license or the suspension of business, there is a possibility that our business may be affected.

4.

Risks in legal regulations

UT Group conducts operations according to a diverse range of laws and regulations, including Japan’s Labor Standards Act, Industrial Safety and Health Act, Workmen's Accident Compensation Insurance Act, Ministerial Notification No. 518 of the MHLW, Health Insurance Act, and Act on the Protection of Personal Information.
UT Group always ensures maintenance of corporate compliance, promotes clients’ correct understanding on compliance, and focuses on contributing to sound development of the manufacturing outsourcing industry. However, in case of a breach of law, there is a possibility that our business may be affected due to the rescission of the license, loss of credibility in society, and other reasons.

5.

Revision of the Worker Dispatching Act

The Revised Worker Dispatching Act, which was enacted on September 30, 2015, requires agencies to provide support for their dispatched workers’ career building, and education and training. The Act also specifies measures for stable employment. We recognize this revision is intended for stable employment and sound development of the dispatched industry and it would help boost our business opportunities as it allows indefinite-term dispatched workers to be employed without time limit. However, there is a possibility that intensified competition and other factors may prevent expected demand growth to materialize and may not allow us to make progress as smoothly as expected.

6.

Financial conditions

UT Group borrows money needed for business expansion from many financial institutions. At present, our borrowing rates are at low levels, thanks to monetary easing policies and other factors. In arrangements with some financial institutions, a financial covenant has been attached to the loan agreement. In the case of breach of such a condition, there is a possibility that we may face an increase in borrowing rates or a decrease in periodic profit, which may influence our business results and financial conditions.

7.

Risks in fluctuation in price of investment securities

UT Group makes capital alliance for maintaining long-term friendly relationship, or make strategic corporate acquisition, with an aim to expand its existing business base or enter into new business. For reasons such as capital alliance and corporate acquisition, we have purchased investment securities and shares of related companies, which are unlisted in the stock markets. These securities have inherent risk for price decline caused by deterioration in business results or financial conditions, economic fluctuation of the industries they are involved with, or changes in their business environment. A significant decline in market value or effective market value of investment securities or shares of related companies may force us to record loss on sale or valuation loss, and influence our business results or financial conditions.

8.

Technical employees and their employment

It is the “technical employees” (defined by us as employees assigned to work at the production sites of our clients; they include both regular employees and contract employees) who actually perform the work contracted by UT Group companies. In principle, these employees are based on the indefinite-term employment contracts. The work that we do under contract is performed, in virtually all instances, by groups or teams, led by experienced personnel establishing a chain of command. If there is an insufficiency of skill or experience, we raise the technical levels of employees through training programs or on-the-job training. If a team becomes understaffed, we either transfer someone to the team or hire a person to fill the position. The employment of technical employees may have the following risks.

(i) With regard to hiring of technical employees, the job market conditions may make it difficult for UT Group companies to hire the personnel required.
(ii) Hiring costs may increase due to a lower retention rate of our technical employees.
(iii) The national population, especially young people, has been on a declining trend since 2000. The average age of the technical employees is relatively low. A decrease in the working-age population may make hiring more difficult.
(iv) UT Group companies’ hiring policy is to hire locally but if the hiring environment becomes tougher and local hiring more difficult, staff may be hired in another region and transferred, which may generate initial relocation expenses and depress the gross margin.

9.

Damage caused by natural disasters and other events

UT Group is prepared for emergency, by having an emergency countermeasure manual and a recovery manual for the Group’s Business Continuity Plan (BCP). However, a large-scale natural disaster may influence our business performance.

10.

Personal information and client information

UT Group has personal information on numerous employees from the time they joined the company. We also handle clients' confidential data in each business division. We have set a certain security standard, and give the right to access data to a limited number of personnel in charge. However, in the event that information leaks occur despite our efforts, this may greatly affect UT Group's performance.

11.

Information security

UT Group has mainly stored the Company’s client information and personal information on file servers and maintains security by limiting the number of viewers and introducing strict access control. Access from outside the Company is also strictly controlled. However, in the event that information leaks occur despite our efforts, this may greatly affect UT Group's performance.

12.

M&A, capital alliances, and other actions

UT Group has a designated section in charge of M&A and capital alliances. The experienced personnel in charge are engaged in the examination of deals, negotiations regarding alliances, and marketing activities. Targeted deals, after careful due diligence, are discussed at a designated meeting, resolved by the Board of Directors, and negotiated. However, there is a possibility that a potential acquisition deal may not proceed as expected. In the event that the management of the acquired business is not successful, the collection of invested capital may become difficult, leading to the risk of generating goodwill impairment loss, and this may have an adverse impact on UT Group's performance.

Risks in business

1.

Risks relating to overseas relocation of manufacturing bases

In case that Japanese manufacturers relocate their manufacturing bases overseas and reduce their domestic production bases, this may greatly affect UT Group companies’ operating performance.

2.

Variable factors relating to operating performance

Japanese manufacturers, who are UT Group’s clients, need to turn labor costs into variable costs. We recognize that clients make use of UT Group companies’ personnel dispatch and manufacturing outsourcing services of in order to achieve flexibility in modifying production levels in accordance with changes in business conditions, in addition to hiring qualified professionals capable of making immediate contributions to their operations. Consequently, along with a decline in production levels of our clients, we tend to face a decline in contractual outsourcing work volume and intensified price competition with our competitors. On the other hand, in order to alleviate the risk of these variable factors, we devote efforts to building a partnership with our clients and aim at receiving long-term, stable outsourcing contracts. In case that our technical employees who are based on the indefinite-term employment with UT Group companies cannot be smoothly re-assigned to other work sites, they are put on a stand-by status, which may depress our earnings. In case that UT Group companies rapidly increase the contractual work volume, the burden of hiring costs may increase ahead of generating sales and have an adverse influence on performance in a given term.

3.

Risks relating to “contractual on-site work”

As a part of the manufacturing outsourcing operations, UT Group is engaged in “contractual on-site work” at domestic manufacturers’ factories. In conjunction with this, we sign equipment lease contracts with clients, and bear liability for damage to equipment during the term of the contract. UT Group companies in outsourcing operations. We also bear part of the productivity risk and the risk of producing defective products. In the event that “technical employees” suffer industrial accidents such as injury while on the job, we bear responsibility for such accidents. In case that the costs of such damage and injury increase, this may affect UT Group companies’ business performance.