KOKUSAI ELECTRIC CORPORATION

There is a high risk of shortages of necessary materials or rises in market prices due to delays or disruptions in the supply of purchased materials, sudden increases in demand, and geopolitical risks. In particular, switching to alternative suppliers for certain purchased items requiring customer approval takes time, and delivery delays or order cancellations can occur if a supplier is affected by a disaster or goes bankrupt. Purchase price increases have continued in recent years, and the Group is responding by promoting multi-vendor sourcing, regularly holding business partner meetings, establishing an emergency response MAP for suppliers, and making efforts to pass on price increases to products.

If confidential information, customer information, or personal information is unintentionally leaked, or if an information system failure occurs due to cyberattacks, unauthorized access, natural disasters, or human error, this could have a material impact on business performance through business disruption, loss of social trust, damage compensation, and decreased product competitiveness. The Group continuously strengthens countermeasures through operation of the Information Security Committee, development of internal regulations, access restrictions, stricter password management, and establishment of a communication and reporting system in the event of an incident.

Sudden fluctuations in semiconductor device demand, geopolitical risks such as US-China trade friction (EAR amendments and export controls), the Russia-Ukraine situation, and deteriorating cross-strait relations, may affect the Group's procurement, manufacturing costs, and sales plans. Changes in sales opportunities to China, including Japan's export controls on advanced semiconductor manufacturing equipment that took effect in July 2023, pose a risk directly linked to business performance. Under a comprehensive management framework overseen by the Sustainability Committee, the Group is promoting market trend research, customer dialogue, and optimization of regional sales composition.

The semiconductor device market has an unstable structure in which rapid expansion of supply-demand gaps repeatedly leads to oversupply, price collapse, and capital expenditure restraint, and downward revisions to WFE market forecasts directly lead to delays or reductions in major customers' investment plans. In addition, since switching costs to change equipment manufacturers are high, new sales to users of competing equipment are difficult, and delayed responses to sudden demand surges during market upturns can also affect business relationships. The Group continuously monitors market trends from private research institutions (such as TechInsights) and promotes research and development of value-added products.

While the Group maintains an advantage in ALD film deposition technology and plasma treatment technology, if it falls behind competitors in technological innovation or productivity improvements, or if emerging competitors gain prominence, there is a risk that a decline in order intake and market share will worsen sales and profits. Maintaining competitiveness in cost, performance, and production volume remains an ongoing challenge. The Group addresses this through market and competitive analysis and active investment in the development of differentiated technologies.

Due to consolidation and integration in the semiconductor industry, the Group's revenue is significantly dependent on certain major customers. If transaction volumes decline due to changes in major customers' business policies, technological innovation, geopolitical effects, tariff policies, or if trade receivables become uncollectible due to deterioration in a major customer's financial condition, this could have a material impact on business performance. Credit risk is managed through regular credit investigations, setting of transaction limits, and continuous monitoring of management indicators.

If the Toyama Plant and Tonami Plant, the Group's main production sites, become unable to operate for an extended period due to large-scale disasters such as earthquakes, floods, or fires, this could have a material impact on production and sales activities. In addition, a global pandemic of infectious disease could spread throughout the business via city lockdowns, travel restrictions, supply chain disruptions, and reduced capital expenditure. The Group addresses this through formulating policy manuals, safety and health management based on ISO45001, establishing service bases near customer sites, and maintaining a system for the rapid establishment of a countermeasure headquarters.

In connection with the acquisition of Hitachi Kokusai Electric Inc. through the 2018 LBO, goodwill of ¥59,065 million and other intangible assets of ¥44,389 million were recorded as of FY2026 (ending March 2026), accounting for 28.8% of total consolidated assets. Under IFRS, these are not amortized but are tested for impairment each period, so if business revenue or cash flow generation capacity declines, a substantial impairment loss may need to be recognized. As of FY2026 (ending March 2026), the recoverable amount would equal the carrying amount if future cash flows decreased by 72.3%; the Group addresses this by strengthening profitability, acquiring POR, and expanding the product life cycle business.

With the increasing structural complexity of semiconductor devices and the shift toward high-growth industries (data centers, 5G, AI), semiconductor manufacturing equipment is required to achieve both highly sophisticated technology and high productivity, amid intense generation-by-generation technological development competition. Delayed responses to changes in market conditions or failure to maintain product competitiveness could have a material impact on business performance. The Group's basic policy is active investment in research and development and the continuous provision of value-added products that meet customer needs.

Due to labor shortages caused by the declining birthrate and aging population, if it becomes difficult to continuously recruit and retain necessary personnel, or if key personnel are lost, this could lead to a decline in product development capability and the quality of customer support, affecting business performance. In global business expansion, securing diverse talent and fostering an organizational culture are prerequisites for growth. The Group addresses this through improving operational efficiency using AI, expanding hiring of experienced personnel, utilizing a group-wide common learning management system, and implementing internal education programs.