Business Risks

Below is a summary of risks that could affect the USHIO Group’s business performance, financial position, and cash flow adversely and materially. These are the risks evaluated and cited by the Group as of the date (June 29, 2016) the Group’s Annual Securities Report was submitted. This is only a partial listing, and does not cover all the risks the Group faces.

(1)Fluctuations in Demand in the Semiconductor and LCD Industries

The Group’s business performance is affected by fluctuations in demand in the semiconductor and LCD industries. Currently, the USHIO Group’s product line includes lamps for manufacturing equipment. These products are consumables, and demand for these lamps is generally steady as long as customer plants are operating. However, the semiconductor and LCD manufacturing equipment the Group handles is affected by changes in demand for products in the short‒term and the medium‒to‒long‒term, as well as by technological developments, which can materially affect the Group’s business performance and financial position.

(2)Fluctuations in Market Demand for Illumination and Irradiation Light Sources

In addition to the semiconductor and LCD panel fields, the Group supplies light sources that are equipped in data projectors and digital cinema projectors and for illumination. Trends in technology and fluctuations in prices and demand for these light sources could materially affect the Group’s business performance and financial position.

(3)Fluctuations in Demand in Imaging Equipment

The Group supplies cinema projectors and large projectors for business use. Fluctuations in demand in business areas, technical trends in the market, and fluctuations in prices could have a material impact on the Group’s business performance and financial position.

(4)Access to Raw Materials

The Group relies on externally sourced raw materials that it obtains from a broad range of suppliers to ensure the steady supply of high‒quality materials at stable prices. In particular, rare metals such as tungsten and molybdenum and special glass are the essential raw materials for manufacturing lamps. Supply shortages or price increases of these materials may boost manufacturing costs and materially affect the Group’s business performance and financial position.

(5)Cross‒Border Activities and Entering Overseas Markets

The Group conducts manufacturing and sales activities in regions outside Japan such as other Asian nations, North America, and Europe. Entry into these overseas markets is accompanied by potential risks in each country, such as changes in various rules and regulations, instability in securing human resources, underdeveloped infrastructure, and social unrest. If realized, these risks could materially affect the Group’s business performance and financial position.

(6)Intellectual Property

The Group operates in business sectors characterized by frequent technological advances. Protecting, maintaining, and managing patents, trademarks, and other intellectual property are key factors to remaining competitive and maintaining a market share in those business sectors. Litigation could arise if a third party were to infringe on the Group’s intellectual property rights, or if the Group were to infringe on a third party’s intellectual property rights. In addition, the patent authorities could refuse patent applications submitted by the Group. Events such as these which would significantly compromise the Group’s protection of its intellectual property rights could materially affect the Group’s business performance and financial position.

(7) Currency Exchange Rates

The Group conducts its commercial and financial operations such as investments and loans in yen and other currencies. Profits and losses in the Group’s commercial and financial operations conducted in foreign currencies are subject to the influence of fluctuations in currency exchange rates. The Group uses forward exchange contracts to moderate currency exchange risk, but it cannot negate this risk completely. Fluctuations in the foreign exchange rates could therefore materially affect the Group’s business performance and financial position.

(8)Fluctuations in Prices of Marketable Securities

The Group holds marketable securities as financial assets. Depending on the stock market and other conditions, the fair value of these securities could decline. This leaves the Group exposed to the risk of fluctuations in the prices of marketable securities, which could materially affect the Group’s business performance and financial position.