Nippon Avionics Co., Ltd.

The Information Systems business serves government customers such as space and defense sectors, and the scale and content of defense budgets affect business performance over the medium term. The Electronic Equipment business serves general corporate customers in Japan and overseas, and if changes beyond expectations occur in demand trends in overseas markets, this may affect business performance and other results. While the Company closely monitors customer demand trends and incorporates them into budgeting, a risk remains that changes exceeding expectations cannot be fully addressed.

Due to intensifying competition in the electronics industry, Electronic Equipment products in particular are exposed to severe price competition. The Company strives to maintain competitiveness through cost reduction efforts and the introduction of high value-added products, but if price competition further intensifies or becomes prolonged, this may affect business performance and other results. A decline in profitability could become a continuing challenge.

In the electronics industry, rapid technological advances and rapid changes in user needs continue, and the Company carries out ongoing new product development to maintain competitiveness. However, if technological innovation or changes in needs occur at a pace exceeding the Company's efforts, this may affect business performance and other results. The risk of technological obsolescence is a structural challenge to the sustainable growth of the business.

Securing and developing excellent human resources is essential for developing, manufacturing, and selling competitive products, and the Company is actively engaged in recruitment and talent development. If the Company is unable to secure or develop the necessary human resources, this may affect business performance and other results. For FY2026 (ending March 2026), the Risk and Compliance Committee and the Board of Directors have identified "securing and developing human resources" as a particularly important risk and have indicated a policy of prioritizing countermeasures for it.

Rising prices of components and raw materials, fluctuations in procurement availability due to natural disasters or worsening international conditions, quality defects, and logistics disruptions may result in delivery and delivery date delays, lost business opportunities, and increases in cost of sales. While the Company is implementing measures such as securing necessary inventory levels, sourcing from multiple suppliers, and sharing information with suppliers, the impact on the supply chain arising from the situation in the Middle East continues to require close monitoring.

Cyberattack risk has been increasing in recent years, as evidenced by publicized unauthorized access incidents at defense-related companies, and if an information leak occurs, this may result in a decline in social credibility and substantial cost burdens. Based on the "Avio Information Security Basic Policy," the Company implements targeted attack email training, network vulnerability assessments by external organizations, and security measures for defense business, but complete protection against cyberattacks exceeding expectations cannot be guaranteed.

While products are manufactured under strict quality control, the possibility of recalls or product liability arising from product defects cannot be ruled out. The Company has established a Production Design Promotion Department and a Quality Promotion Department reporting directly to the Executive Officer and President, and works to prevent quality-related improprieties through on-site ("sangenshugi") audits, while also maintaining product liability insurance; nonetheless, depending on circumstances, this may affect business performance and other results.

Inventory is expected to arise from maintenance parts held to support the long life cycle of Information Systems products, as well as from rapid changes in demand trends for Electronic Equipment products. If such inventory becomes obsolete, valuation losses or disposal of inventory may affect business performance and other results. Although the Company continues process improvement activities such as lead time reduction, it is difficult to completely eliminate inventory risk.

The Company handles some transactions denominated in foreign currencies, and sharp fluctuations in exchange rates may affect business performance and other results. While risk reduction is pursued through negotiations for yen-denominated transactions, complete hedging is difficult. With the expansion of global business operations, ongoing management of foreign exchange fluctuation risk is required.

The Company has implemented measures such as thorough dissemination of the "Avio Group Charter of Corporate Behavior" and the "Avio Group Code of Conduct," a compliance hotline, and confirmation of compliance status by the Risk and Compliance Committee; however, the possibility of fraudulent acts by employees and others in the course of business cannot be reduced to zero. If such fraudulent acts occur, the Company may face claims for damages from third parties, suspension of business operations, suspension of transactions, and other dispositions, which may affect business performance and other results as well as social reputation.