Di-Nikko Engineering Co.,Ltd.

In the EMS business, while shortages and delivery delays for semiconductors and other components have largely been resolved, delivery delays continue for some electronic components, and the company continues to be forced to hold a certain level of component inventory to address QCD (quality, cost, delivery) requirements. Excessive inventory buildup directly affects the company's financial position and operating results, and if delivery delays from electronic component manufacturers continue, there is a possibility that production plans could also be disrupted. The company has positioned purchasing and inventory management as its most critical issue and is addressing it, but a fundamental resolution has not yet been achieved.

The company group has expanded its business scale with the Canon Group as a major customer, and the sales dependency ratio remains high at 23% in both FY2024 and FY2025. If the Canon Group reduces, postpones, or cancels its manufacturing plans, or if sales of its final products decline, there is a risk of a direct impact on the financial position and operating results of the company group. As a countermeasure, the company is focusing on expanding sales channels with new customers to relatively reduce this dependency, but at present the reduction in dependency has been limited.

The company group has established business bases in Asian regions such as China in response to the overseas relocation of major customers and expanding overseas demand. Changes in political and economic conditions, revisions to laws, regulations, and tax systems, and the occurrence of conflicts, disasters, or infectious disease outbreaks in China and other Asian regions could have a significant impact on the continuity and profitability of local operations. Since these risks stem from external factors, this is an area that is difficult for the company to directly control.

The company group, which has overseas business locations, is susceptible to the effects of exchange rate fluctuations. While it seeks to hedge this risk through forward exchange contracts based on internal regulations, it cannot completely avoid the impact of sharp exchange rate movements. In particular, as the scale of business in China and other Asian regions expands, the impact of exchange rate fluctuations on financial position and operating results becomes greater. The hedging effect of forward exchange contracts has limitations, and losses may occur in the event of unexpectedly sharp fluctuations.

The company group primarily procures capital expenditure and working capital funds through borrowings from financial institutions, and its dependence on interest-bearing debt remains high, at 42.0% at the end of FY2024 (December 2024) and 40.7% at the end of FY2025 (December 2025). In a rising interest rate environment, financial costs increase, having a significant impact on performance. The equity ratio stood at only 24.1% at the end of FY2025 (December 2025), and if profitability continues to decline due to soaring raw material and energy prices or price reduction requests from customers, there is a risk that improvement of the financial structure will be delayed.

The equity ratio stood at a low level of 23.3% at the end of FY2024 (December 2024) and 24.1% at the end of FY2025 (December 2025), leaving the financial base vulnerable. The company aims to improve this through the accumulation of retained earnings, but if cost increases due to soaring prices of various raw materials and energy, or price reduction requests from customers, put pressure on profits, there is a possibility that expected profits will not be achieved and improvement of the financial structure will be delayed. Continued high financial leverage poses a risk of undermining management stability in the event of a deterioration in the external environment.

The company group's products are incorporated into final products such as automotive equipment, medical equipment, industrial equipment, office equipment, and equipment for social and daily life, and the scope of impact in the event of defects is extensive. Although the company has obtained ISO9001, ISO14001, and ISO13485 certifications at all production sites and has established an international quality control system, if a quality problem or recall occurs due to an unforeseen event, it could have a significant impact on financial position and operating results through substantial cost burdens and loss of credibility. The social impact of quality problems is particularly significant for products used in medical equipment and automotive equipment.

The company group has established a legal compliance system centered on the Compliance and Risk Management Committee, and continuously conducts awareness activities for officers and employees, but recognizes that compliance risks cannot be completely avoided. If a situation arises that violates laws or regulations, it could affect operating results and financial condition through loss of social credibility and payment of damages. The company's business operations spanning multiple locations both domestically and overseas is also a factor that complicates responses to laws and regulations in each country and region.