Public companies are required to disclose risks that can affect the business and impact the stock. These disclosures are known as “Risk Factors”. Companies disclose these risks in their yearly (Form 10-K), quarterly earnings (Form 10-Q), or “foreign private issuer” reports (Form 20-F). Risk factors show the challenges a company faces. Investors can consider the worst-case scenarios before making an investment. TipRanks’ Risk Analysis categorizes risks based on proprietary classification algorithms and machine learning.

NEC disclosed 36 risk factors in its most recent earnings report. NEC reported the most risks in the “Finance & Corporate” category.

Risk Overview Q1, 2020

Risk Distribution

44% Finance & Corporate

14% Legal & Regulatory

14% Macro & Political

11% Production

8% Tech & Innovation

8% Ability to Sell

Finance & Corporate - Financial and accounting risks. Risks related to the execution of corporate activity and strategy

This chart displays the stock's most recent risk distribution according to category. TipRanks has identified 6 major categories: Finance & corporate, legal & regulatory, macro & political, production, tech & innovation, and ability to sell.

Risk Change Over Time

S&P500 Average

Sector Average

Risks removed

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NEC Risk Factors

New Risk (0)

Risk Changed (0)

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No changes from previous report

The chart shows the number of risks a company has disclosed. You can compare this to the sector average or S&P 500 average.

The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.

Risk Highlights Q1, 2020

Main Risk Category

Finance & Corporate

With 16 Risks

Finance & Corporate

With 16 Risks

Number of Disclosed Risks

S&P 500 Average: 31

Recent Changes

0Risks added

0Risks removed

0Risks changed

Since Mar 2020

0Risks added

0Risks removed

0Risks changed

Since Mar 2020

Number of Risk Changed

S&P 500 Average: 3

See the risk highlights of NEC in the last period.

Risk Word Cloud

The most common phrases about risk factors from the most recent report. Larger texts indicate more widely used phrases.

Risk Factors Full Breakdown - Total Risks 36

Finance & Corporate

Total Risks: 16/36 (44%)Below Sector Average

Share Price & Shareholder Rights6 | 16.7%

Share Price & Shareholder Rights - Risk 1

Our business could be harmed if we fail to meet corporate governance and social responsibility requirements.

We are subject to corporate governance and social responsibility requirements, including those relating to fair dealing and competition, human rights, workplace safety and sanitation, sustainability and other issues. These requirements and legal frameworks continue to evolve, and in some of the jurisdictions in which we operate, we are under increasing scrutiny concerning such issues by not only regulatory authorities but also other stakeholders such as investors, non-government organizations and transaction counterparties. Despite our efforts to meet applicable regulatory requirements and stakeholder expectations regarding corporate governance and social responsibility issues through implementation and improvements of our internal policies, procedures and initiatives, and other measures, we may not be able to fully meet such requirements and expectations. Our inability to do so could expose us to regulatory, financial and reputational risks.

Share Price & Shareholder Rights - Risk 2

Rights of shareholders under Japanese law may be different from rights of shareholders of companies organized in other jurisdictions.

Our articles of incorporation and the Companies Act of Japan (Act No. 86 of 2005), or the Companies Act, govern our corporate affairs. Legal principles relating to matters such as the validity of certain corporate procedures, directors' and corporate officers' fiduciary duties and liabilities, and shareholders' rights under Japanese law may be different from, or less clearly defined than, those that would apply to a company incorporated in another jurisdiction. For example, under the Companies Act, only holders of 3% or more of our total voting rights or our outstanding shares are entitled to examine our accounting books and records. In addition, shareholders' rights under Japanese law may not be as extensive as shareholders' rights under the laws of other jurisdictions. Furthermore, there is a degree of uncertainty as to what duties the directors of a Japanese joint stock corporation (kabushiki kaisha) may have in response to an unsolicited takeover bid, and such uncertainty may be more pronounced than that in other jurisdictions. You may have more difficulty in asserting your rights as a shareholder than you would as a shareholder of a corporation organized in another jurisdiction. In addition, Japanese courts may not be willing to enforce judgments of non-Japanese courts against us which are based on non-Japanese securities laws, including U.S. federal and state securities laws.

Share Price & Shareholder Rights - Risk 3

Investors holding less than a full "unit" of shares of our common stock will have limited rights as shareholders.

Pursuant to the Companies Act and certain related legislation, our articles of incorporation provide that 100 shares of our common stock each constitute one unit of shares. Under the Companies Act, holders of shares of our common stock constituting less than a full unit do not enjoy the right to vote. In addition, shares constituting less than a full unit do not comprise a trading unit, except in limited circumstances, and accordingly may not be sold on the Tokyo Stock Exchange on which our common stock is listed. Under the unit share system, any holder of shares constituting less than a full unit has the right to request that we purchase such shares constituting less than a full unit. In addition, any holder of shares constituting less than a full unit has the right to request that, pursuant to our articles of incorporation and share handling regulations, we sell such number of shares that, when combined with the number of shares already held by such holder, constitute a whole unit of shares.

Share Price & Shareholder Rights - Risk 4

Because of daily price range limitations under Japanese stock exchange rules, you may not be able to sell our shares at a particular price on any particular trading day, or at all.

Stock prices on the Tokyo Stock Exchange are determined on a real-time basis by the balance between bids and offers. The Tokyo Stock Exchange is an order-driven market without specialists or market makers to guide price formation. To prevent excessive volatility, the Tokyo Stock Exchange sets daily upward and downward price range limitations for each listed stock, including our common stock, based on the previous day's closing price or special quote. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell shares of our common stock at a price above or below the relevant daily limit on the Tokyo Stock Exchange may not be able to sell at such price on a particular trading day, or at all.

Share Price & Shareholder Rights - Risk 5

You will be investing in securities that are not listed on any national securities exchange in the United States.

While our common stock is listed on the Tokyo Stock Exchange, we do not intend to seek any listing for our common stock on a national securities exchange in the United States. As a result, there may be little or no liquidity for shares of our common stock in the United States, and investors may be limited to trading through the Tokyo Stock Exchange or through some alternative trading markets. In addition, because we do not intend to seek a listing on a national securities exchange in the United States, we are not subject to some of the corporate governance requirements typically applicable to public companies in the United States, particularly those imposed on listed companies by U.S. national securities exchanges, such as rules related to director independence and requirements related to audit and other board committees.

Share Price & Shareholder Rights - Risk 6

Prior notification under the Foreign Exchange and Foreign Trade Act of Japan may be required in the case of acquisition by foreign investors of a certain portion of our shares.

Because we are engaged in certain businesses designated by the Foreign Exchange and Foreign Trade Act of Japan (Act No. 228 of 1949, as amended, the "FEFTA") and its related cabinet orders and ministerial ordinances (collectively, the "Foreign Exchange Regulations"), such as businesses of manufacturing equipment related to national defense, if a foreign investor intends to consummate an acquisition of shares of our common stock that constitutes an "inward direct investment" under the Foreign Exchange Regulations, the foreign investor, in general, must file prior notification of such inward direct investment with the Minister of Finance and any other competent Ministers. "Inward direct investment" includes an acquisition by a foreign investor of shares of our common stock as a result of which acquisition such foreign investor, in combination with any existing holdings, directly or indirectly holds 1% or more of the total number of issued shares or the total number of voting rights. While certain exemptions from the prior notification requirements are provided for under the Foreign Exchange Regulations, certain foreign investors seeking to make such acquisition may not be eligible for such exemptions. If such prior notification is filed, the proposed acquisition may not be consummated until the prescribed screening period expires. In some cases, the Ministers may extend the screening period, and may recommend or order any modification or abandonment of such acquisition. In addition, if certain conditions including those prescribed in light of national security of Japan under the Foreign Exchange Regulations are met, the Ministers may order the disposal of the shares acquired or take other measures. Consequently, any foreign investor seeking to acquire shares of our common stock that constitutes an "inward direct investment" may not consummate such acquisition in an expected time frame, in accordance with an intended plan, or at all. Additionally, if a foreign investor directly or indirectly holds 1% or more of the total voting rights and, at a general meeting of shareholders, consents to certain proposals having a material influence on our management such as the (i) election of such foreign investor or any of its related persons (as defined in the Foreign Exchange Regulations) as our director or corporate auditor or (ii) transfer or discontinuation of its business, such consent, subject to certain exemptions, also constitutes an "inward direct investment" requiring prior notification. If such prior notification is filed, such consent cannot be given until the prescribed screening period expires. As a result, such foreign investors may have difficulties giving such consent in accordance with an intended plan, or at all. The discussion above is not exhaustive of all possible foreign exchange controls considerations that may apply to a particular investor, and potential investors are advised to satisfy themselves as to the overall foreign exchange controls consequences of the acquisition, ownership and disposition of shares of our common stock or voting rights by consulting their own advisors. For a more detailed discussion on the requirements and procedures regarding the prior notifications under the Foreign Exchange Regulations, see "Item 10. Additional Information-D. Exchange Control."

Accounting & Financial Operations4 | 11.1%

Accounting & Financial Operations - Risk 1

We may be required to recognize impairment losses with regard to goodwill.

As a result of our acquisitions of Northgate Public Services Limited in the United Kingdom (in January 2018, with the remaining shares acquired in March 2018) and KMD Holding ApS in Denmark (in February 2019), we have recorded significant goodwill. As of March 31, 2019 and 2020, we had goodwill of ¥188.2 billion and ¥182.3 billion, respectively. We may also record additional goodwill as a result of further acquisitions in the future. Our consolidated financial statements are prepared in accordance with IFRS, which requires testing cash generating units, or CGUs, to which goodwill has been allocated for impairment at least once annually, regardless of any indication of impairment. In addition, whenever events or changes in circumstances indicate that a CGU to which goodwill has been allocated may be impaired, we perform an additional impairment test to determine whether the carrying amount of such CGU exceeds the recoverable amount. The recoverable amount of a CGU is the higher of its fair value less costs of disposal and its value in use. In determining the value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate (or rates) that reflects current market assessments of the time value of money and the risks specific to the asset. If the carrying amount of a CGU with goodwill on our statement of financial position exceeds its recoverable amount, we would be required to recognize an impairment loss. Any impairment loss shall first reduce the carrying amount of goodwill allocated to the CGU. Any impairment losses for tested goodwill will adversely affect our results of operations and financial condition.

Accounting & Financial Operations - Risk 2

Our shareholders of record on a record date may not receive the dividend they anticipate.

The customary dividend payout practice and relevant regulatory regime of publicly listed companies in Japan may significantly differ from that widely followed or otherwise deemed necessary or fair in foreign markets. While we may announce forecasts of year-end and interim dividends prior to the record date, these forecasts are not legally binding. We are not able to ultimately determine any dividend payment amount to our shareholders of record as of a record date, including whether we will make any dividend payment to such shareholders at all, until after such record date. For that reason, our shareholders of record on a record date may not receive the dividends they anticipate.

Accounting & Financial Operations - Risk 3

Our revenues and profitability can fluctuate from period to period, and are often difficult to predict for particular periods due to factors beyond our control.

Our results of operations for any quarter or year are not necessarily indicative of results to be expected in future periods. Our results of operations have historically been, and will continue to be, subject to quarterly and yearly fluctuations as a result of a number of factors, including: - introduction and market acceptance of new technologies, products and services;- delay or failure in development or commercialization of technologies or infrastructures to support them;- generational technology upgrades, expiration of support services contracts for widely used software products, and technology investment cycles;- variations in product and service costs and mix of products and services sold;- seasonality of purchasing cycles of our customers, particularly some Japanese national and local governments and Japanese business enterprises that tend to increase their purchases and accept deliveries of products and services during the fourth quarter of their fiscal year, which typically ends on March 31;- size and timing of customer orders, which in turn will often depend upon the success of our customers' businesses or specific products or services; and - impact of acquired businesses and technologies. There are other trends and factors beyond our control that may affect our operations and make it difficult to predict results of operations for a particular period. These include: - adverse changes in the conditions in the markets of the products and services that we offer;- changes in conditions in the broader markets for ICT infrastructure and in the Japanese and global economies generally;- governmental decisions regarding the development and deployment of ICT infrastructure, including the size and timing of governmental expenditures in these areas;- size and timing of capital expenditures and ICT spending by our customers;- inventory management practices of our customers;- changes in governmental regulation or policy affecting the ICT industry;- adverse changes in capital and financial markets, and the ability of our customers and suppliers to obtain financing or to fund capital expenditures; and - adverse changes in the credit quality of our customers and suppliers. These trends and factors could have a material adverse effect on our business, results of operations and financial condition.

Accounting & Financial Operations - Risk 4

Failure of internal controls may significantly harm our business, results of operations and financial condition.

We have established internal controls that are designed to provide reasonable assurance of the reliability of our financial reporting in accordance with the applicable Japanese regulatory standards, but our internal controls may not be successful or otherwise sufficient to detect all forms of potential errors or misconduct. While we evaluate and seek to enhance the effectiveness of our internal controls, human error, misconduct or fraudulent act may occur due to inherent limitations of internal controls or deficiencies or weaknesses in our internal controls. Unforeseen changes in the business environment or unusually complex transactions may impose challenges on our efforts to maintain effective internal controls. We may consequently be required to restate our financial information and spend significant resources on remedying deficiencies and weaknesses. We may also become subject to administrative or judicial action. In addition, our reputation may be damaged. These consequences could have a material adverse effect on our business, results of operations and financial condition. As we operate in multiple markets with diverse business lines, we may encounter difficulty in streamlining our operational processes from the perspective of enhancing efficiency and ensuring effective internal controls, particularly when we acquire and integrate into our group a company that is engaged in a business unfamiliar to us or that operates in a market unfamiliar to us. Such streamlining efforts may require significant management, human and financial resources.

Debt & Financing1 | 2.8%

Debt & Financing - Risk 1

We may not be able to obtain additional financing necessary to meet our funding needs due to a decline in our credit profile, difficult financial market conditions and other factors, and this may have a material adverse effect on our business.

Our primary sources of funds have historically been cash flows from operations, borrowings from banks and other institutional lenders and funding from the capital markets, such as offerings of commercial paper and other debt securities. A decline in our credit profile could result in a downgrade in our ratings or otherwise lead to increases in our interest expenses and could have an adverse impact on our ability to access the commercial paper market or the public and private debt markets, which could have an adverse effect on our liquidity, results of operations and financial condition. Because we maintain a relatively high level of leverage, our operations may be particularly affected in the event that we encounter difficulties in accessing public or private debt markets. As of March 31, 2020, the balances of our borrowings and bonds were ¥320.2 billion and ¥199.6 billion, respectively. See "Item 5.B. Operating and Financial Review and Prospects-Liquidity and Capital Resources-Sources of Funding and Liquidity." A failure of one or more of our major lenders, a decision by one or more of them to stop lending to us or instability in the capital markets could have an adverse impact on our access to funding. If we fail to obtain external financing on terms acceptable to us, or at all, or to generate sufficient cash flows from our operations or sales of our assets, when necessary, we will be unable to fulfill our obligations, and our business, results of operations and financial condition may be materially adversely affected. To the extent we finance our operations with additional debt, we may become subject to financial and other covenants that may restrict our ability to pursue our business strategy.

Corporate Activity and Growth5 | 13.9%

Corporate Activity and Growth - Risk 1

We may face difficulties with respect to new businesses.

The process of developing new products and services entails many risks. The development and manufacturing processes can be lengthy and costly and require us to commit significant resources well in advance of sales. For example, in July 2019, we acquired OncoImmunity AS as part of our initiative to establish an AI-driven drug discovery business. Because we have limited experience with drug development, we anticipate that this initiative may not become profitable for an extended period and is still subject to the risk of failure despite continued effort and investment. Additionally, technology and standards may change while we are in the development stage, rendering any new products or services we develop obsolete or uncompetitive before their introduction. Any of our newly developed products or services may also contain undetected errors that may be discovered after their introduction and distribution, resulting in liability for losses caused by such errors and reputational harm, which may adversely affect our business, results of operations and financial condition.

Corporate Activity and Growth - Risk 2

We may have difficulty achieving the benefits expected from recently completed and future acquisitions and other business combinations and reorganizations.

As part of our business structure improvement strategy, we recently completed, and will continue to seek appropriate opportunities for, acquisitions and other business combinations. For example, as part of our growth strategy to expand our "Safer Cities" initiative, we acquired Northgate Public Services Limited in the United Kingdom in January 2018 (with the remaining shares acquired in March 2018) and KMD Holding ApS in Denmark in February 2019. However, we may be unable to find appropriate target companies with strengths that match the objectives of our inorganic growth strategy, whether due to a lack of such target companies, insufficient interest on the part of such target companies to be acquired or our inability to accurately discern which potential target companies would be appropriate. Even if we are able to find such appropriate target companies, the success of these acquisitions and other transactions are subject to various risks, such as the following: - we may be unable to realize the growth opportunities, cost efficiencies, investment effect and other expected benefits of these acquisitions, business combinations and reorganizations in the expected time period or at all;- future transactions may not be completed as scheduled, or at all, due to legal or regulatory requirements or contractual and other conditions to which such transactions are subject;- unanticipated problems could also arise in the integration process, including unanticipated restructuring or integration expenses and liabilities, as well as delays or other difficulties in coordinating,consolidating and integrating personnel, information and management systems, and customer products and services, particularly in markets outside Japan;- the combined or reorganized entities may not be able to retain existing customers and strategic partners to the extent that they wish to diversify their suppliers for cost and risk management and other purposes;- the combined or reorganized entities may require additional financial support from us;- the diversion of management and key employees' attention may detract from our ability to increase revenues and minimize costs with respect to our existing core business segments;- goodwill and other intangible assets arising from the acquisitions, business combinations and reorganizations are subject to potential impairment charges;- our investments in the combined or reorganized entities are subject to possible valuation and other losses; and - the transactions may result in other unanticipated adverse consequences. Any of the foregoing and other risks may adversely affect our business, results of operations, financial condition and stock price.

Corporate Activity and Growth - Risk 3

We rely on our strategic partners and co-participants in various projects, and our business could suffer if our relationships with them change adversely or if we encounter problems relating to their products or services.

We have entered into a number of long-term strategic alliances with leading industry participants, both to develop new technologies and products and to manufacture existing and new products. For example, in October 2018 we announced a mobile 5G development partnership with Samsung Electronics Co., Ltd. If our strategic partners encounter financial or other business difficulties, if their strategic objectives change or if they no longer perceive us to be an attractive alliance partner, they may no longer be able or desire to participate in our alliances. Our business could be hurt if we are unable to maintain our alliances. In addition, as a result of such strategic alliances, we may become dependent on our alliance partners for product lines using co-developed technologies, leaving us with less flexibility in expanding or diversifying our product offerings. Our competitors may form similar strategic alliances to strengthen their competitive positions in the same product lines. We participate in various projects where we and various other companies provide services and products that are integrated into systems to meet customer requirements. If a partner company is unable to continue its role due to bankruptcy or other reasons or if any of the services or products that a partner company provides have any defects or other characteristics that cause the integrated systems to malfunction or otherwise fail, we may be unable to meet customer requirements, and our reputation and business could be significantly harmed.

Corporate Activity and Growth - Risk 4

We may not succeed in executing our growth strategies outside Japan.

Our strategies include various measures to expand our business in markets outside Japan such as the planned expansion of our "Safer Cities" initiative. As we expand our business geographically, we will be exposed to risks that are unique to particular jurisdictions or markets with which we may be less familiar. Our efforts to penetrate new markets or offer new products and services may not succeed if product or market opportunities develop more slowly than expected, if our new products and services are not well accepted among customers, if the profitability of opportunities is undermined by competitive pressures or regulatory limitations, or if our planned acquisitions, investments or capital alliances are not approved by regulators. We may also lack sufficient knowledge or understanding of local business practices or legal and regulatory requirements. Depending on the market, we may encounter difficulties in finding suitable business, joint venture and alliance partners. In various overseas markets, we face barriers in the form of long-standing relationships between our potential customers and their local suppliers as well as protective regulations. In addition, pursuing international growth opportunities may require us to make significant investments long before we realize any returns on the investments. Increased investments may result in expenses growing at a faster rate than revenues. Our overseas projects and investments could also be adversely affected by: - foreign currency exchange controls;- restrictions on foreign investment or the repatriation of income or invested capital;- nationalization of local industries;- changes in export or import restrictions;- regulations in foreign markets, including with respect to licenses and permits that may be required from local authorities;- changes in the tax system or rate of taxation in the countries where we do business; and - economic, social and political risks. In addition, problems in foreign financial markets and economies could adversely affect demand from customers in the affected markets. Because of these factors, we may not succeed in expanding our business in international markets, and our business growth prospects, results of operations and financial condition could be materially and adversely affected.

Corporate Activity and Growth - Risk 5

We may not be able to achieve the goals set forth in our medium-term management plan.

In January 2018, we launched our current medium-term business plan for the three fiscal years ending March 31, 2021, with the goal of improving our profitability and growing our business. However, we may be unable to achieve this goal within our anticipated timeline or at all due to various factors, including those discussed in more details elsewhere herein, particularly: - intense competition not only with our current competitors but also with new entrants into our markets;- changes in the market or regulatory environment;- fluctuations in exchange rates, which may result in exchange rates that differ from the rates used in our projections;- increases in component prices, research and development expenses, and personnel expenses as well as incurrence of significant unexpected costs and expenses;- unexpected trends in the ICT industry or customer preferences or purchase patterns;- failure to achieve synergy and other benefits expected from our inorganic growth strategy, particularly with respect to the integration of acquisitions as part of our "Safer Cities" initiative;- inability to achieve anticipated cost reductions;- inability to deliver products and services that meet the required specifications and quality standards in a timely manner or inability to effectively control project costs and expenses, which could result in the incurrence of additional costs and compensation to customers for losses caused by such inability; and - negative impacts on our business, financial condition and results of operations caused by the coronavirus pandemic. For a more detailed discussion on our current medium-term management plan, see "Item 4.B. Information on the Company-Business Overview-Overview-Medium-Term Management Plan."

Legal & Regulatory

Total Risks: 5/36 (14%)Below Sector Average

Regulation1 | 2.8%

Regulation - Risk 1

We face regulatory change and uncertainty, as well as potential legal liability, in many jurisdictions in which we operate.

In many of the jurisdictions in which we operate, our business is subject to various risks associated with unexpected legal or regulatory changes, uncertainty in the application of laws and governmental policies, and uncertainty relating to legal liabilities. Substantial changes in the legal or regulatory environment, including the economic, trade, tax, defense, labor, spending, privacy and other policies of the governments of Japan and other jurisdictions in which we operate could require us to change our businesses or otherwise adversely affect our business, results of operations and financial condition. For example, sanctions and import and export controls imposed by governments of various jurisdictions restricting or prohibiting transactions with certain persons or entities in or affiliated with certain countries or involving certain products or conduct expose us to potential administrative, civil and criminal liabilities and penalties, including fines, debarment from government contracts and loss of import and export privileges. Sanctions laws and import and export restrictions are changing rapidly for certain geographies. Our existing compliance program may not be effective at preventing violations of sanctions laws and import and export restrictions, and violations of such laws and restrictions could have an adverse effect on our reputation, business, results of operations and financial condition. In addition, we may be unable to gain or retain our customers or investors, government or non-government entities, including institutional investors, with policies to refrain from transacting with, or investing in, companies doing business with persons or entities in or affiliated with sanctioned countries. Moreover, if any products that we sold to customers are resold or reused in contravention with sanctions laws or import and export restrictions, our reputation may be damaged. For additional information, see "Item 8.A. "Financial Information-Consolidated Statements and Other Financial Information-Legal Proceedings."

Litigation & Legal Liabilities1 | 2.8%

Litigation & Legal Liabilities - Risk 1

We may become involved in costly and time-consuming legal proceedings, including intellectual property litigation and infringement claims, that may substantially increase our costs and harm our business.

From time to time, we are sued or receive notices regarding patent and other intellectual property claims. Due to the existence of a large number of patents and other intellectual property rights in our industry and the rapid rate at which new patents and other intellectual property rights are created, we may be unable to determine in advance whether a product or service or any of its components may infringe any third-party intellectual property rights. Whether or not such infringement claims have merit, significant resources may be required to defend against them. If an infringement claim against us is successful and we are unable to obtain the license for the infringed technology or substitute it with similar non-infringing technology, our business could be adversely affected. We may also become subject to judicial or administrative proceedings involving issues under commercial, anti-competition, anti-bribery, product liability, environmental and other laws and regulations. The outcome of such proceedings, including the extent of the potential impact of any unfavorable outcome on our financial results, however, is inherently uncertain and difficult to predict. The extent of financial, management, human and other resources required to deal with such proceedings or to take any action given such outcome is similarly uncertain and could be significant. Such resources may also be difficult for us to secure in a timely manner, and our operations could be disrupted if our resources are extensively deployed to deal with such proceedings and outcome. In addition, if we violate legal or regulatory requirements, we could be required to pay fines or penalties, and government agencies, local governments and intergovernmental organizations could suspend or debar us as a contractor or prevent us from participating in bidding or proposal processes, which could have a material adverse impact on our business, results of operation, financial condition and reputation.

Taxation & Government Incentives1 | 2.8%

Taxation & Government Incentives - Risk 1

Changes in effective tax rates or deferred tax assets, or adverse outcomes resulting from an examination of our income tax returns, may harm our results of operations.

Our effective tax rate is subject to volatility and could be adversely affected by, among other factors: - earnings declining in countries that have lower tax rates and increasing in countries that have higher tax rates;- changes in the valuation of our deferred tax assets and liabilities;- transfer pricing adjustments;- tax effects of nondeductible compensation; or - changes in tax laws, regulations, accounting standards or interpretation thereof in the various jurisdictions in which we operate. Any significant increase in our future effective tax rates could reduce our net profit for future periods. We currently carry deferred tax assets resulting from tax loss carryforwards and deductible temporary differences, both of which may reduce our taxable income in the future. Deferred tax assets may only be realized against taxable income. The amount of our deferred tax assets considered realizable could be reduced from time to time if estimates of future taxable income from our operations and tax planning strategies during the carryforward period are lower than previously estimated due to deterioration in market conditions or other circumstances. The amount of our deferred tax assets could also be reduced as a result of changes in applicable tax laws and regulations, including decreases in statutory tax rates, as well as applicable accounting standards. Any such reduction in our deferred tax assets will adversely affect our income for the period of such adjustment. In addition, we are subject to continuous audits and examination of our income tax returns by tax authorities of various jurisdictions. We regularly assess the likelihood of adverse outcomes resulting from these audits and examinations to determine the adequacy of our provisions for income taxes. There can be no assurance that the outcomes of these audits and examinations will not have an adverse effect on our business, results of operations and financial condition.

Environmental / Social2 | 5.6%

Environmental / Social - Risk 1

We are subject to various environmental laws and regulations, and there may be costs associated with compliance or remediation.

Our operations are subject to many environmental laws and regulations governing, among other things, air emissions, wastewater discharges, the use and handling of hazardous substances, waste disposal, chemical substances in products, product recycling, soil and ground water contamination, and global warming. We face risks of environmental liability arising from our current, historical and future manufacturing activities. Our failure to comply with current and future environmental laws and regulations, or the identification of contamination for which we are liable, could subject us to substantial costs, including fines, clean-up costs, third-party property damage or personal injury claims, and make significant investments to upgrade our facilities or curtail our operations. Identification of presently unidentified environmental conditions, more vigorous enforcement by a governmental authority, enactment of more stringent legal requirements or other unanticipated events could give rise to adverse publicity, restrict our operations, affect the design or marketability of our products or otherwise cause us to incur material environmental costs, adversely affecting our results of operations and financial condition. We endeavor to comply with laws and government policies through various measures, including our environmental management standards and long-term climate change policy guidelines as well as inspections and environmental auditing in accordance with our internal environmental policies, but these measures may not be effective at avoiding potential liabilities arising from our current, historical and future manufacturing activities. However, costs associated with additional or stricter environmental compliance or remediation obligations could adversely affect our business, results of operations and financial condition.

Environmental / Social - Risk 2

Information security and data protection concerns and restrictions could harm our business.

We collect, store, use, transfer or otherwise process a voluminous amount of personal information and confidential information in the regular course of our business. For example, we are required to handle personal information in compliance with the Personal Information Protection Act of Japan and similar laws in other jurisdictions in which we operate, including the European Union's General Data Protection Regulation which became effective in May 2018. If personal or confidential information in our possession about our customers or employees is leaked or improperly accessed and subsequently misused, we may be subject to liability and regulatory action, and our reputation and brand value may be damaged. In addition, the cost and operational consequences of implementing further data protection measures could be significant. In the current business environment, we face increasing and evolving risks regarding cybersecurity and privacy, including hacking, employee malfeasance, human or technological error, and fraudulent inducement of disclosure of information, which expose us to potentially significant financial loss, liability and damage to our brand and reputation. Such risks include attempted breaches not only of our own products, services and systems, but also those of our customers, contractors, suppliers, business partners and other third parties. Our products, services and systems, including cloud-based systems as well as systems and technologies that we maintain on behalf of our customers, may be used in their critical operations, or involve the storage, processing and transmission of personal, confidential and other sensitive data. These products, services and systems are also used by customers in highly regulated industries, such as financial and healthcare services, as well as government agencies. Cybersecurity breaches, if successful, could result in, for example, unauthorized access to or loss or destruction of personal, confidential and other sensitive data as well as systems, delays in and disruptions to business activities and denials of services, and disruptions to critical infrastructure, including utility, information technology and communications. In addition, the increasingly sophisticated and pervasive nature of certain cybersecurity threats and vulnerabilities, as well as the increasing scale and complexity of the business and infrastructure that can be targeted, make it possible that certain threats and vulnerabilities will not be detected or mitigated in a timely manner. For example, in July 2018, we discovered that certain files relating to a major customer had been accessed by third parties without authorization, although we do not believe that any confidential information was accessed in the intrusion. Cybersecurity risk to us and our customers also depends on factors such as the actions, practices and investments of customers, contractors, suppliers, business partners and other third parties. As our business and the cybersecurity landscape evolve, we may find it necessary to make significant further investments to protect data and infrastructure. There are numerous laws and regulations in various jurisdictions regarding privacy, data protection, information security, and the storing, sharing, use, processing, transfer, disclosure and protection of personal data. In light of the increasing pace of new technology development, including with respect to biometric data, AI and related human rights issues that are particularly relevant to our "Safer Cities" initiative, the scope of these data protection and privacy-related laws and regulations are expanding, subject to differing interpretations, and may be inconsistent among jurisdictions, or conflict with other rules. These laws and regulations are evolving and may result in increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. We are also subject to the terms of our privacy policies and contractual obligations to third parties related to privacy, data protection and information security. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or other third parties, or applicable laws or regulations relating to privacy, data protection, or information security may result in governmental investigations or enforcement actions, litigation, claims or public statements against us by consumer advocacy groups or others, and could result in significant liability or cause our customers to lose trust in us, which could cause them to cease or reduce use of our products and services and otherwise have an adverse effect on our reputation and business. Any similar failure or perceived failure by users of our products or services may also have an adverse effect on our reputation and business. In addition, legal, regulatory, contractual and other obligations as well as public concerns relating to privacy, data protection or information security could restrict our ability to store and process data as part of our solutions or otherwise impact our ability to provide our solutions in certain jurisdictions, and may result in the loss of business opportunities from customers operating in, or seeking to expand into, those jurisdictions.

Macro & Political

Total Risks: 5/36 (14%)Above Sector Average

Economy & Political Environment1 | 2.8%

Economy & Political Environment - Risk 1

Adverse economic conditions in Japan, our primary market, or internationally may harm our business, results of operations and financial condition.

Our business is significantly dependent on the Japanese economy. Our sales to customers in Japan accounted for 75.7% of our consolidated revenue for the fiscal year ended March 31, 2020. Any future deterioration in the Japanese economy or the financial condition or performance of our customer base in Japan may materially and adversely affect our business, results of operations and financial condition. Additionally, the ongoing aging and decline of the population in Japan may adversely affect the Japanese economy. Our business may also be negatively affected by changes in economic conditions in other markets, particularly Asia, the United States and Europe, as well as by trends in the global economy. Geopolitical issues, such as recent military confrontations in the Middle East, and trade conflicts, including uncertainty regarding trade tensions between the United States and China and resulting trade restrictions such as tariffs, have recently contributed to increasing uncertainties in global markets, and increases in protectionist trade policies more generally may also contribute to slower global macroeconomic growth. Epidemics such as virus outbreaks, including the recent coronavirus pandemic, or seasonal influenza may also negatively affect economic conditions in the global economy. Shifts in the policy or budgetary focus of national or local governments in Japan or internationally for economic or other reasons may also adversely affect our business. Uncertainties in the Japanese and global economy make it difficult to forecast future levels of economic activity. Because the components of our planning and forecasting depend upon estimates of economic activity in the markets that we serve, increasing economic uncertainties make it more difficult than usual to estimate our future revenue and required expenditures. If unexpected changes in economic conditions occur in the future, we may not be able to respond appropriately to the changing market conditions.

Natural and Human Disruptions2 | 5.6%

Natural and Human Disruptions - Risk 1

The recent outbreak of the novel coronavirus could have a significant negative impact on our business, results of operations and financial condition.

In December 2019, a novel strain of a virus named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), or coronavirus, which causes coronavirus disease, or COVID-19, was reported to have surfaced in Wuhan, China. Since that time, coronavirus has spread to other regions and countries including Japan where our primary office is located. On March 11, 2020, the World Health Organization characterized the coronavirus outbreak as a pandemic. The coronavirus pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures. The coronavirus and related government countermeasures may result in ongoing social, economic, financial and labor instability in the countries in which we, our suppliers and our customers operate. The extent to which the coronavirus will ultimately impact our operations and those of our suppliers and customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the pandemic and related countermeasures, new information that may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. As our corporate customers as well as our Japanese national and local government customers focus on addressing the various difficulties presented by the emergency situation, they may become more constrained in their ability to engage our services and purchase our products at the levels that we anticipated prior to the crisis. If the pandemic results in a decline in IT-related investments by our customers, our business, results of operations and financial condition would be adversely affected. In addition, disruptions in public and private infrastructure, including communications, financial services and supply chains, could materially and adversely disrupt our normal business operations. To date, we have transitioned a significant subset of our employee population to a remote work environment in an effort to mitigate the spread of the coronavirus, which may exacerbate certain risks to our business, including increased risk of cybersecurity attacks and increased risk of unauthorized dissemination of proprietary or confidential information about us, our customers or other third-parties. Although we have not closed any of our production facilities and have not yet experienced significant disruptions in our supply chain, the ongoing pandemic could result in facility closures by our customers or suppliers, general business shutdowns and financial difficulties. The pandemic could also result in increased prices, delays or difficulty in obtaining such components and raw materials. We cannot presently predict the overall scope or duration of business disruptions as a result of the coronavirus, but our ability to conduct our business as previously planned could be materially and negatively impacted. With respect to our remote work arrangements to address the spread of coronavirus, we had previously introduced a policy of allowing employees to work from home in 2018 and have been able to take advantage of such existing infrastructure and remote working initiatives to implement the pandemic-related transition. In order to further adapt to these remote working arrangements in response to the coronavirus, we have converted to various electronic means of internal authorizations and execution of agreements and work orders. Although we expect that our financial reporting systems, internal controls over financial reporting and disclosure controls and policies will continue to function effectively, even in the event that remote work arrangements continue for an extended period of time, there is no guarantee that these systems and controls will function with the same level of efficiency as before the pandemic, and these adaptations and modified processes do introduce additional risks of mistakes or failures. Capital markets have been affected by the pandemic, and general credit spreads for corporate debt issuances, including ours, have begun to widen. If a prolonged pandemic were to result in a significant deterioration in the global economy such that the ordinary functioning of financial institutions is suspended, our ability to issue additional bonds or receive bank loans at satisfactory rates or at all could be adversely affected. Depending on the overall duration and severity of the impact of the coronavirus pandemic, we may be required to recognize material impairments of our non-financial assets, including, but not limited to, goodwill, intangible assets and right-of-use assets. Additionally, declines in the value of our equity holdings in various major companies could negatively impact our financial condition. As of March 31, 2020, equity instruments designated as financial assets measured at fair value through other comprehensive income were valued at ¥167.2 billion, but we expect that the general negative impact of the coronavirus pandemic on equity markets may result in a decrease in the value of these holdings. In light of the developments set forth above and other reasons that may emerge due to the coronavirus pandemic and any associated protective or preventative measures, it is difficult to estimate with certainty the overall future impact to our business, results of operations and financial condition. While the coronavirus pandemic did not have a material adverse impact on our consolidated financial statements as of and for the fiscal year ended March 31, 2020, future events and circumstances may result in the coronavirus pandemic having a more negative impact on our operations. To date, coronavirus-related developments have adversely affected the global economy and may have a material adverse effect on our business, results of operations and financial condition. See "Item 4.B. Information on the Company-Business Overview-Overview-Medium-Term Management Plan-Impact of the Coronavirus Pandemic," "Item 5. Operating and Financial Review and Prospects-Introduction-Recent Developments-Coronavirus" and "Item 5.D. Operating and Financial Review and Prospects-Introduction-Trend Information."

Natural and Human Disruptions - Risk 2

Natural disasters, public health issues, armed hostilities, terrorism and other causes over which we have little or no control could harm our business.

Natural disasters, fires, storms, floods, droughts and other severe weather conditions caused by climate change, public health issues, armed hostilities, terrorism and other events, whether in Japan or any other country in which we operate, could cause damage or disruption to us, our customers or suppliers, or could lead to economic stagnation, fluctuations in foreign currency exchange rates and interest rates, political or economic instability, or deterioration in public safety and other conditions, any of which could harm our business. In Japan, we are exposed to heightened risks of large-scale natural disasters, particularly earthquakes and typhoons. A large-scale earthquake may lead to, among other things, tsunamis, soil liquefaction and fires, as well as electricity power supply shortages, and may result in significant damage to, or losses of, tangible or human assets, market disruptions or a longer-term economic slowdown. With increasing intensity and frequency in recent years, typhoons may also result in, among other things, floods, landslides and gusts causing similar damage, losses and other consequences. For example, the Great East Japan Earthquake of 2011 caused the temporary suspension of manufacturing activity at our facility in the Tohoku region, and in October 2019 a typhoon caused some flooding-related damage at a portion of our Tamagawa plant. Our disaster mitigation measures, emergency and business continuity plans, training and education programs may not address all eventualities resulting from natural disasters, including disruption or destruction of power, gas, water, communications, transportation and other infrastructures, property and human casualties, reduction or suspension of manufacturing capacities, logistics and supply chain interruptions, deterioration in product and service quality, and safety, health and environmental issues. In addition, in the event of a viral epidemic, including a further escalation of the recent outbreak of the novel coronavirus COVID-19, we may encounter difficulty maintaining an adequate level of human resources or workplace safety, declines in demand for our products and services from customers in the affected areas and disruptions to the operations of our suppliers. These events could have a material adverse effect on our business.

Capital Markets2 | 5.6%

Capital Markets - Risk 1

Our operating and financing activities expose us to foreign currency exchange and interest rate risks, which may adversely affect our revenues and profitability.

We are exposed to risks of foreign currency exchange rate fluctuations, particularly for the Japanese yen against the U.S. dollar and euro. Our consolidated financial statements, which are presented in Japanese yen, are affected by fluctuations in foreign exchange rates. Changes in exchange rates affect the yen value of our equity investments and monetary assets and liabilities arising from business transactions in foreign currencies. They also affect the costs and sales proceeds of products or services that are denominated in foreign currencies. Despite measures undertaken by us to reduce or mitigate foreign currency exchange risks, foreign exchange rate fluctuations may hurt our business, results of operations and financial condition. Depending on the movements of particular foreign exchange rates, we may be adversely affected at a time when the same currency movements are benefiting some of our competitors. We are also exposed to risks of interest rate fluctuations, which may affect our overall operational costs and the value of our financial assets and liabilities, in particular, long-term borrowings. As of March 31, 2020, we had ¥65.7 billion of long-term borrowings subject to floating interest rates. Despite measures undertaken by us to mitigate our exposure against interest rate fluctuations, such fluctuations, whether due to ordinary course market movements or actions by central banks, may increase our operational costs, reduce the value of our financial assets or increase the value of our liabilities. For a discussion of foreign currency fluctuations, see "Item 11. Quantitative and Qualitative Disclosures About Market Risk-Foreign Currency Exchange Risk."

Capital Markets - Risk 2

Changes in the markets in which we operate may harm our business, results of operations and financial condition.

We are exposed to the risk that broader changes and trends in the ICT industry, both in Japan and overseas, may affect demand for the products and services that we provide. Demand for our products and services can be negatively affected by sluggish economic activity, a general lack of demand for the products and services that we provide during a given season or economic period, potential obsolescence due to market developments and technological trends, an increase in the level of inventories for the types of products we produce in the broader market as well as a decline in our cost competitiveness. Because the markets in which we operate are constantly evolving, a recovery in prices or demand in a certain segment of the market or over a specific period of time does not necessarily mean that prices or demand will not fall or otherwise adversely affect our operations again in the future. These types of market changes are unpredictable and may materially and adversely affect our business, results of operations and financial condition.

Production

Total Risks: 4/36 (11%)Below Sector Average

Manufacturing1 | 2.8%

Manufacturing - Risk 1

Failures in the products and services that we provide, including potential claims relating to defects or delays, could result in significant direct or indirect costs to us.

Many of our products and services are used in critical situations where the adverse consequences of defects, failure to meet customers' demands for reliability, safety and performance or delay of project completion may be severe, exposing us to even greater risk. Moreover, any defects in our products and services, including those used in the public services sector, may have a far-reaching impact, negatively affecting a large population of end-users. Product and service defects or delays could subject us to liability for significant damages, including consequential damages, as well as potential penalties, sanctions or costs in connection with product recalls. Although our products and services are generally related to ICT solutions, exposing us to customary risks of technology failure or computer viruses, many of our products and services are used in infrastructure that is directly related to the protection of human life, such as communication systems for fire rescue services. To the extent our products and services are involved in incidents that result in personal injuries or the loss of life, we may be exposed to liability far in excess of the risks faced by a typical company in the ICT industry. The innovative technologies in our products and services may also expose us to liability of a type that is difficult to foresee. Any reputational harm and regulatory sanctions that arise from these problems could harm our ability to sell our products and services. Furthermore, defects, delays, penalties, sanctions, recalls or other difficulties may result in projects that continue to be unprofitable for extended periods. These circumstances could adversely affect our business, results of operations and financial condition.

Employment / Personnel2 | 5.6%

Employment / Personnel - Risk 1

If we fail to attract, hire and retain skilled personnel, we may not be able to achieve our business objectives.

As an ICT company, we must compete for talented employees to develop our products, services and solutions, and our competition for these potential employees includes multinational technology companies with considerable resources. As a result, our human resources organization focuses significant efforts on attracting and retaining individuals in key technology positions, and our recruitment and personnel costs may increase in the future. Changing technology and industry preferences may increase the need for hiring differently skilled and diversified talent. For example, recent trends in digitization and automation have resulted in increased demand for talent with differentiated skills in AI, machine learning, data science and statistical analysis, and we foresee fiercer competition for such talent. Moreover, the talent pools with such skills could be different from our traditional sources of recruitment. If we experience a substantial loss of, or an inability to attract, talented personnel, we may be unable to meet our business objectives.

Employment / Personnel - Risk 2

Declines in our pension assets and changes in discount rates and other actuarial assumptions we use to determine our defined benefit obligation may adversely affect our financial condition and results of operations.

We may face adverse effects on our financial conditions and results of operations relating to our employees' retirement benefit plans from changes in the market value of equity securities and other pension assets and a decline in returns on our pension assets. Furthermore, in accordance with applicable accounting rules, we make certain assumptions in determining the present value of our defined benefit obligation. Changes in the discount rates and other actuarial assumptions we use in determining the present value of our defined benefit obligation may have an adverse effect on our financial condition and results of operations. For example, any future reduction in discount rates or recognition of past service cost as a result of plan amendments may have the effect of increasing our defined benefit obligation and defined benefit cost.

Supply Chain1 | 2.8%

Supply Chain - Risk 1

Our failure to procure components, equipment or other supplies as planned could adversely affect our results of operations.

Our operations depend on procuring components, equipment and other supplies in a timely manner. In some cases, we purchase on a just-in-time basis, which reduces the margin for error of our procurement activities. Because the products that we purchase are often complex or specialized, it may be difficult for us to substitute one supplier for another or one product for another within a reasonable time frame or at all. Some products are available only from a limited number of suppliers or a single supplier, which may decrease our bargaining power and negatively affect our procurement costs. Although we believe that supplies of the components, equipment and other supplies that we use are currently adequate, shortages in critical materials could occur due for example to an interruption in supply, a shift in regulatory trends, an increase in industry demand or geopolitical tensions that may result in tariffs or other trade restrictions. Any shortages may result in increased costs in order to adjust our supply chain to procure necessary replacements and could adversely affect our production capacity and efficiency. In addition, a financial market disruption could pose liquidity or solvency risks for our suppliers, which could reduce our sources of supply or disrupt our supply chains. Furthermore, in the event that we procure components, equipment or other supplies that are defective, the reliability and reputation of our products and services could be adversely affected. Our business, results of operations and financial condition would be adversely affected if we are unable to obtain adequate delivery of these supplies in a timely manner and at an acceptable price.

Tech & Innovation

Total Risks: 3/36 (8%)Below Sector Average

Innovation / R&D1 | 2.8%

Innovation / R&D - Risk 1

If we fail to keep pace with rapid technological advancements in our industry, or if we pursue technologies that do not become commercially accepted, customers may not buy our products and services, and our revenue and profitability may decline.

The markets for the products and services that we offer are characterized by rapidly changing technology, evolving technical standards, changes in customer preferences and frequent introduction of new products and services. The development and commercialization of new technologies and the introduction of new products and services will often make existing products and services obsolete or unmarketable. Our competitiveness in the future will depend at least in part on our ability to: - keep pace with rapid technological developments and maintain technological leadership, including with respect to the increasingly important fields of AI, IoT, biometrics and cybersecurity technology;- enhance our existing products and services;- develop and manufacture innovative products and services that meet our customers' needs in a timely and cost-effective manner;- utilize or adjust to new products, services and technologies;- attract and retain highly capable technical and engineering personnel;- accurately assess the demand for, and market acceptance of, new products and services that we develop;- avoid delays in developing or distributing new products;- address increasingly sophisticated and diversifying customer requirements; and - integrate our products into our customers' products and systems. We may not be successful in identifying and marketing product and service enhancements, or offering and supporting new products and services, in response to technological changes as well as changes in customer preferences that require increasingly diverse sources of value. Additionally, future technological changes may not advance in accordance with historical trends or predicted courses or timetables. For example, as the hardware in certain fields in which we operate has approached maturity, we have in recent years observed a general trend towards a focus on software innovation rather than continued hardware innovation. If we fail to adequately monitor and address these technological changes and changes in customer preferences or accurately anticipate the direction of such changes, our business, results of operations and financial condition may be significantly harmed. Furthermore, we may encounter difficulties in incorporating our technologies into our products and services in accordance with our customers' expectations, which may adversely affect our relationships with our customers, our reputation and our revenues. We seek to form and enhance alliances and partnerships with other companies to develop and commercialize technologies that will become industry standards for the products and services that we currently sell and plan to sell in the future. We spend significant financial, human and other resources on developing and commercializing such technologies. We may not, however, succeed in developing or commercializing such standard-setting technologies if our competitors' technologies are accepted as industry standards. In such case, our competitive position, reputation, results of operations and financial condition could be adversely affected.

Trade Secrets2 | 5.6%

Trade Secrets - Risk 1

If we are unable to protect our intellectual property rights, our business and prospects may be harmed.

We depend on our proprietary technology and our ability to obtain patents and other intellectual property rights covering our products, services, business models, and design and manufacturing processes. As of March 31, 2020, we held approximately 47,000 patents issued in Japan and other jurisdictions and have a significant number of Japanese and foreign patent applications pending. The process of seeking and maintaining patent protection can be long and expensive. Our patents could be challenged, invalidated or circumvented. The fact that we hold many patents or other intellectual property rights does not ensure that the rights granted under them will provide competitive advantages to us. For example, the protection afforded by our intellectual property rights may be undercut by rapid changes in technologies in the industries in which we operate. Similarly, there can be no assurance that claims allowed on any future patents will be sufficiently broad to protect our technology. Effective patent, copyright and trade secret protection may be unavailable or limited in some countries, and our trade secrets may be vulnerable to disclosure or misappropriation by employees, contractors and other persons. Further, pirated products of inferior quality infringing our intellectual property rights may damage our reputation and adversely affect sales of our products. Litigation, which could consume significant financial and management resources, may be necessary to enforce our patents or other intellectual property rights.

Trade Secrets - Risk 2

If we are unable to obtain certain intellectual property licenses owned by third parties, our business could be adversely affected.

Many of our products are designed to utilize software or other intellectual property licensed from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, we believe that, based upon experience and standard industry practice, these licenses generally can be obtained on commercially reasonable terms. However, there can be no assurance that we will be able to obtain the licenses that we will need from third parties on commercially reasonable terms or at all. If we are unable to obtain necessary licenses for the operation of our business, we may be required to limit or cease our operations that make use of such license and may be unable to compete effectively. Any of these results would adversely affect our business, results of operations and financial condition.

Ability to Sell

Total Risks: 3/36 (8%)Below Sector Average

Competition1 | 2.8%

Competition - Risk 1

We are subject to intense competition in many of the markets in which we operate, and this may adversely affect our ability to maintain or grow our sales and profits.

Intense competition creates a challenging environment for us in many of the markets in which we operate. Such competition places significant pressure on our ability to maintain or improve our profitability and is particularly acute during market slowdowns. The entry of additional competitors into the markets in which we operate increases the risk that our products and services will become subject to intense price competition. Some of our competitors, mainly in Asian countries, may have an advantage of having lower operating costs than us and may be able to compete for customers more effectively than we can based on price. There is also the risk that our competitors may engage in strategic pricing, especially in the case of multinational corporations with which we may compete in the future that possess extensive financial resources that far exceed our own in terms of the ability to absorb sustained losses. Additionally, we may face new competition over time from such multinational corporations as technologies evolve and new technological solutions become available in the markets in which we compete. Such multinational corporations may also be able to invest significantly higher amounts of resources in research and development as well as employ far larger numbers of personnel. In recent years, the time between the introduction of a new product developed by us and the production of the same or a comparable product by our competitors has become shorter. This has increased the risk that the products we offer will become subject to intense price competition sooner than in the past. We have many competitors in Japan and other countries, ranging from large multinational corporations to a number of relatively small, rapidly growing and highly specialized companies. Unlike many of our competitors, however, we operate in many businesses and compete with companies that specialize in one or more of our product or service lines. As a result, even if we have more combined resources than our specialized competitors, we may not be able to fund or invest in specific subsets of our businesses as much as our specialized competitors can, and we may not be able to change or take advantage of market opportunities as quickly or as effectively as they can due to their smaller size and narrower focus. Our participation in competitive bidding or proposal processes for government and other large projects with demanding price and other requirements can place further downward pressure on our profitability. In order to maintain or improve our profitability while meeting such demanding requirements, we continuously strive to increase our revenue by, among other means, offering and delivering innovative and unique value to customers and to reduce our costs and expenses through optimization of our development and manufacturing operations, business process improvements and other measures. However, these measures may be insufficient to enable us to maintain or improve our operating profit margin on such projects. We sell products and services to some of our current and potential competitors. For example, we receive orders from, and provide solutions to, competitors that further integrate or otherwise use our solutions for large projects for which such competitors are engaged as the primary solutions provider. If these competitors cease to use us as their secondary solutions provider for such large projects for competitive or other reasons, our business could be harmed.

Demand1 | 2.8%

Demand - Risk 1

We conduct a substantial amount of business with a concentrated customer base, and our business could suffer if they encounter business problems or decide to reduce their business with us.

A substantial portion of our business portfolio consists of projects for government entities and certain large network and other infrastructure companies, such as the NTT group. Fluctuations in demand for such projects, particularly large-scale projects, or our potential inability to secure such projects through the applicable bidding processes, may have a significant impact on our revenue. Furthermore, we engage in a significant amount of projects with a large number of government entities, and contracts with government entities can be reduced or terminated for funding, policy or other reasons. Similarly, corporate customers may reduce their level of capital expenditures or current procurement, shift their investment focus or otherwise reduce their business with us for business, financial or other reasons. We are also subject to the risk that regulatory restrictions may prevent us from participating in the bidding or proposal processes that are required for obtaining contracts with the various government entities that are our customers and potential customers. For example, in February 2017, we received cease and desist orders from the Japanese Fair Trade Commission and were ordered to pay administrative monetary penalties totaling ¥1.4 billion for violating the prohibition on unreasonable restraint of trade under the Japanese Act on Prohibition of Private Monopolization and Maintenance of Fair Trade due to collusion with other bidders in connection with projects involving equipment for a public utility company and fire and emergency response operations. As a result of these cease and desist orders, we became temporarily ineligible to participate in the bidding process for projects with a significant number of Japanese government agencies and local governments for various periods ranging from one month to 27 months. We complied with all of the requirements under the orders and have implemented various remedial measures to reduce the risk of similar future violations, and all of the restrictions on our ability to bid on public projects had been lifted by May 23, 2019. To the extent that we become unable to participate in projects with our various government entity customers in the future, whether due to fluctuations in demand, changes in government policy or regulatory reasons, our business, results of operations and financial condition could be adversely affected.

Sales & Marketing1 | 2.8%

Sales & Marketing - Risk 1

We are exposed to the risk that our customers, including those with whom we have made deferred payment or other financing arrangements, may encounter financial difficulties.

Many of our customers purchase products and services from us on payment terms that provide for deferred payment. If our customers for whom we have extended payment terms or provided other financing terms or from whom we have substantial accounts receivable encounter financial difficulties or fail to access credit from others and are unable to make payments on time, our business, results of operations and financial condition could be adversely affected. We sometimes provide vendor financing to our customers or offer customers extended payment terms or other forms of financing to assist their purchase of our products and services. If we are unable to provide or facilitate such payment arrangements or other forms of financing to our customers on terms acceptable to them or at all, due to financial difficulties or otherwise, our results of operations and financial condition could be adversely affected.

See a full breakdown of risk according to category and subcategory. The list starts with the category with the most risk. Click on subcategories to read relevant extracts from the most recent report.

FAQ

What are “Risk Factors”?

Risk factors are any situations or occurrences that could make investing in a company risky.

The Securities and Exchange Commission (SEC) requires that publicly traded companies disclose their most significant risk factors. This is so that potential investors can consider any risks before they make an investment.

They also offer companies protection, as a company can use risk factors as liability protection. This could happen if a company underperforms and investors take legal action as a result.

It is worth noting that smaller companies, that is those with a public float of under $75 million on the last business day, do not have to include risk factors in their 10-K and 10-Q forms, although some may choose to do so.

How do companies disclose their risk factors?

Publicly traded companies initially disclose their risk factors to the SEC through their S-1 filings as part of the IPO process.

Additionally, companies must provide a complete list of risk factors in their Annual Reports (Form 10-K) or (Form 20-F) for “foreign private issuers”.

Quarterly Reports also include a section on risk factors (Form 10-Q) where companies are only required to update any changes since the previous report.

According to the SEC, risk factors should be reported concisely, logically and in “plain English” so investors can understand them.

How can I use TipRanks risk factors in my stock research?

Use the Risk Factors tab to get data about the risk factors of any company in which you are considering investing.

You can easily see the most significant risks a company is facing. Additionally, you can find out which risk factors a company has added, removed or adjusted since its previous disclosure. You can also see how a company’s risk factors compare to others in its sector.

Without reading company reports or participating in conference calls, you would most likely not have access to this sort of information, which is usually not included in press releases or other public announcements.

A simplified analysis of risk factors is unique to TipRanks.

What are all the risk factor categories?

TipRanks has identified 6 major categories of risk factors and a number of subcategories for each. You can see how these categories are broken down in the list below.

1. Financial & Corporate

Accounting & Financial Operations - risks related to accounting loss, value of intangible assets, financial statements, value of intangible assets, financial reporting, estimates, guidance, company profitability, dividends, fluctuating results.
Share Price & Shareholder Rights – risks related to things that impact share prices and the rights of shareholders, including analyst ratings, major shareholder activity, trade volatility, liquidity of shares, anti-takeover provisions, international listing, dual listing.
Debt & Financing – risks related to debt, funding, financing and interest rates, financial investments.
Corporate Activity and Growth – risks related to restructuring, M&As, joint ventures, execution of corporate strategy, strategic alliances.

2. Legal & Regulatory

Litigation and Legal Liabilities – risks related to litigation/ lawsuits against the company.
Regulation – risks related to compliance, GDPR, and new legislation.
Environmental / Social – risks related to environmental regulation and to data privacy.
Taxation & Government Incentives – risks related to taxation and changes in government incentives.

3. Production

Costs – risks related to costs of production including commodity prices, future contracts, inventory.
Supply Chain – risks related to the company’s suppliers.
Manufacturing – risks related to the company’s manufacturing process including product quality and product recalls.
Human Capital – risks related to recruitment, training and retention of key employees, employee relationships & unions labor disputes, pension, and post retirement benefits, medical, health and welfare benefits, employee misconduct, employee litigation.

4. Technology & Innovation

Innovation / R&D – risks related to innovation and new product development.
Technology – risks related to the company’s reliance on technology.
Cyber Security – risks related to securing the company’s digital assets and from cyber attacks.
Trade Secrets & Patents – risks related to the company’s ability to protect its intellectual property and to infringement claims against the company as well as piracy and unlicensed copying.

5. Ability to Sell

Demand – risks related to the demand of the company’s goods and services including seasonality, reliance on key customers.
Competition – risks related to the company’s competition including substitutes.
Sales & Marketing – risks related to sales, marketing, and distribution channels, pricing, and market penetration.
Brand & Reputation – risks related to the company’s brand and reputation.

6. Macro & Political

Economy & Political Environment – risks related to changes in economic and political conditions.
Natural and Human Disruptions – risks related to catastrophes, floods, storms, terror, earthquakes, coronavirus pandemic/COVID-19.
International Operations – risks related to the global nature of the company.
Capital Markets – risks related to exchange rates and trade, cryptocurrency.

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