Risks in business operations and other

The UT Group faces the following risk factors which may materially influence investors’ decision making concerning its operating performance and financial positions. Please take note that the risks and uncertainties concerning the UT Group are not limited to the following risks. The forward-looking statements contained below are based on the Group’s judgments as of the end of the current fiscal year, unless otherwise specified.

Group-wide risks

1.

Dependence on specific industries

The UT Group’s major clients are semiconductor and electronics component-related manufacturers, which represent approximately 40% of the UT Group’s sales. The semiconductor and electronics component-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 swift change in sales. We utilize our expertise that has been accumulated in those sectors to expand into the priority areas of the automobile sector and the environment and energy sector, and diversify business fluctuation risks.

2.

Intensified competition and peers in the sector

In the manufacturing dispatch and engineer dispatch areas where the UT Group is engaged, companies strive to enhance their sales and marketing and some are attempting to expand business scale through M&A. The UT Group endeavors to aggressively expand business by increasing shares of business with the existing clients, developing new clients, and acquiring peers. However, intensified competition may make it difficult for us to expand business as planned.

3.

Risks in licensing and legal regulations

UT Group’s subsidiaries hold licenses for undertaking the businesses of general worker dispatch and fee-charging employment placement from Japan’s Minister for Health, Labour, and Welfare. Our Group always ensures maintenance of corporate compliance, promotes clients’ correct understanding on compliance, and focuses on contributing to improve the manufacturing dispatch industry. However, in the case of violation of laws or regulations, our authorization or licenses may be rescinded or our business may be affected.

4.

Revision of the Worker Dispatching Act

The Revised Worker Dispatching Act, which came into force on September 30, 2015, specified measures for stable employment in addition to establishing an obligation of dispatching companies to assist career formation of workers and provide training to them. We recognize that this revision is intended for stable employment and healthy development of the dispatching industry. As dispatched employees who have open-ended employment contacts with a dispatching company can work with no time limit at the client, the UT Group’s business opportunities are expected to expand. However, intensified competition or other factors may make it difficult for us to expand business as planned.

5.

Financial conditions

The UT Group borrows money needed for business expansion from many financial institutions. Our interest-bearing debts were \7,822 million at the end of the current fiscal year. Our borrowing rates have stayed at extremely low levels, thanks to a low interest rate environment in the financial markets. However, in the case of delay in repayment, we may become liable for immediate payments, which may influence our business results and financial conditions.

6.

Risks of fluctuation in price of investment securities

The UT Group is engaged in capital alliances for maintaining long-term friendly relationships, strategic corporate acquisition, and other activities with an aim to expand the existing business base or enter into new business lines. For reasons such as capital alliance and corporate acquisition, we have purchased investment securities and shares of related companies, which are not listed in the stock markets. These securities have inherent risk of 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 a loss on sale or valuation loss, and affect our business results or financial conditions.

7.

Technical employees and their hiring

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 the UT Group companies. In principle, these persons work under long-term employment contracts. The work that we do under contract consists, in virtually all instances, of organizing a team of experienced persons, establishing a chain of command and the performance of work as a team. 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 has the following risks.
(i) With regard to hiring of technical employees, the job market conditions may make it difficult for the 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 in the young brackets, has been on a declining trend since 2000. The average age of the technical employees is relatively low. A decrease in the workforce may make hiring more difficult.
(iv) The 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. Relocation expense may be generated and could lower gross margin.

8.

Damage caused by natural disasters and others

The UT Group is prepared or 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 affect our business results.

9.

Personal information and client information

The UT Group handles personal information of a large number of employees since they join the companies. Our business departments also handle confidential information of clients. We have adopted a certain security standard on diverse personal information and client information and have allowed access only to a limited number of persons in charge. However, in the case of leakage of such information, this may significantly affect the UT Group’s business results.

10.

Information security

The UT Group has client information and personal information in the storage of a file server, which can be accessed only by a limited number of persons and thus maintains security. There is also a restriction to access of these data from outside the companies. However, in the case of leakage of such information, this may significantly affect the UT Group’s business results.

11.

M&As and capital alliances

We have a dedicated department engaged in M&A and capital alliances, where experienced staff in different areas do research on specific deals and are engaged in negotiations, marketing, and sales. After going through due diligence, a potential deal is examined and approved by the appropriate committee and the Board of Directors’ meeting, and is processed to make the draft agreement. However, if the acquisition deal does not proceed as expected or management of an acquired company turns out to be not as well as expected, this may significantly affect the UT Group’s business results.

Risks associated with business

1.

Risks relating to overseas relocation of manufacturing bases

In the case that Japanese manufacturers relocate their manufacturing bases overseas and reduce their domestic production bases, it is possible that there will be an impact on business results of the UT Group companies in their operations.

2.

Variable factors relating to performance

One of the reasons why clients contract on-site work by the UT Group companies is to enable them to turn labor costs into variable costs. We recognize that clients contract the performance of work by others, at their own production sites, in order to achieve flexibility in modifying production levels in accordance with changes in business conditions, as their strategy, in addition to hiring qualified professionals capable of making immediate contributions to their operations.

Consequently, when clients reduce production levels in pace with a slowdown in business, they tend to scale down their outsourcing contracts including those with our outsourcing business companies. Price competition among companies in the outsourcing service sector also tends to intensify.

On the other hand, in order to avoid such variable factors, UT Group companies aim at establishing partnerships with clients and providing our technical employees to them on a long-term stable basis. In the event that they cannot be smoothly re-assigned within our Group, they become redundant, and represent a potential downward influence on our earnings. In the event that the UT Group companies rapidly increase the amount of contractual work, the burden of hiring costs can 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 our manufacturing dispatch business, we are engaged in “contractual on-site work” of certain production processes at manufacturing plants of client companies in Japan. In conjunction with this, we sign equipment lease contracts with clients, and bear liability for damage to equipment during the term of the contract. The UT Group companies in outsourcing operations also bear part of the productivity risk and the risk of producing defective products. In the event that our technical employees suffer industrial accidents such as injury while on the job, we bear responsibility for such accidents. In the event that the costs of such damage and injury increase, it is possible that there will be an impact on the UT Group’s business results.