Risk Factors Risk Factors

Risks Related to Advantest’s Business

Advantest’s business and results of operations are subject to significant demand volatility in the semiconductor industry

Advantest’s business depends largely upon the capital expenditures of semiconductor industrial, design and manufacturing companies, fabless semiconductor companies, foundries and test houses. These companies, in turn, determine their capital expenditure and investment levels largely based on current and anticipated market demand for semiconductors and products incorporating semiconductors. Such demand is influenced significantly by the overall condition of the global economy. Historically, the percentage reduction in capital expenditures by semiconductor manufacturers during downturns in the semiconductor industry, including investment in semiconductor test systems, has typically been much greater than the percentage reduction in worldwide sales of semiconductors. The semiconductor industry has been highly cyclical with recurring periods of excess inventory, which often have had a severe effect on the semiconductor industry’s demand for semiconductor test systems, including those of Advantest.

The worldwide semiconductor market in 2014, the semiconductor market continued to increase by 9.9% compared to 2013, the highest growth rate since 2011, despite some variations among products. In 2015, the semiconductor market decreased by 0.2% compared to 2014, due to the slowdown in demand for electronic equipment such as smartphones. In 2016, the semiconductor market increased by 1.1% compared to 2015, due to the improving functionality and increasing sales volumes of smartphones and others. Worldwide sales of non-memory semiconductors in 2014 increased by 7.6% compared to 2013 due to a further global adoption of smartphones and improvements in handset performance. In 2015, worldwide sales of non-memory semiconductors decreased by 0.4% compared to 2014 due to the slowdown in demand for electronic equipment such as smartphones. In 2016, worldwide sales of non-memory semiconductors increased by 1.3% compared to 2015 due to the increasing of capital investment in smartphone-related production and others. In 2014, worldwide sales of memory semiconductors increased by 18.2% compared to 2013 due to a strong demand of semiconductor for PCs, among other factors. In 2015, sales decreased by 2.6% compared to 2014 due to, as in the case for non-memory semiconductors, the slowdown in demand for electronic equipment such as smartphones. In 2016, worldwide sales of memory semiconductors decreased by 0.6% compared to 2015, although demand for smartphones and high-speed servers increased since the summer.

The significant volatility in demand for semiconductors is affected by various factors such as:

  • the overall state of the global economy;
  • levels of investment in communications infrastructure and trends of demand in communication devices such as smartphones and wearable devices;
  • demand in personal computer and data server industries;
  • consumer demand for digital consumer products such as flat-panel TVs, DVD/Blu-ray disc recorders, portable audio players and electronic books;
  • demand in the automobile industry; and
  • trends in the semiconductor industry.

 

In fiscal 2014, Advantest strove to maximize profitability by engaging in sales promotions for non-memory test systems for which demand growth has been particularly strong and by expanding its customer base across all operating segments. As a result, Advantest’s net sales in fiscal 2014 largely increased ¥163,803 million. Advantest returned to profitability, with net income attributable to owners of the parent of ¥16,753 million, mainly due to higher year-over-year net sales, an improved mix of high-profitability products and successful cost-cutting measures undertaken across the entire Advantest Group. Advantest’s Semiconductor and Component Test System Segment focused on stimulating customer’s motivation to invest despite worsening market conditions by launching new products for memory and non-memory semiconductors. Our Mechatronics System and Services, Support and Others Segments also sought to increase net sales with strategies such as obtaining new customers in growth sectors. As a result, Advantest’s net sales in fiscal 2015 decreased by 1.0%, as compared to fiscal 2014, to ¥162,111 million. Net income attributable to owners of the parent was ¥6,694 million, mainly due to an increase in costs denominated in foreign currency due to the continuing depreciation of the yen. Advantest sought to improve performance, with a focus on capturing new demand from the memory sector, where customers are now highly motivated to invest. As a result, Advantest’s net sales in fiscal 2016 decreased by 3.8%, as compared to fiscal 2015, to ¥155,916 million in spite of appreciation of the yen. Net income attributable to owners of the parent was ¥14,201 million, mainly due to a more profitable sales mix and an increase of deferred tax assets in comparison to the previous fiscal year.

Advantest believes that its results are significantly affected by the significant volatility in demand in the semiconductor industry. While Advantest is unable to predict future trends in the semiconductor industry, if there is a significant downturn in the semiconductor industry, Advantest’s financial condition and results of operations will be adversely affected. With respect to semiconductor prices in recent years, even though prices for products such as DRAM have bottomed out and are rising, if the prices decline as a result of over-supply of semiconductors, semiconductor manufacturers’ earnings could deteriorate, resulting in their restraint towards capital expenditures, and Advantest’s results of operations could be adversely affected.

If Advantest does not introduce new products meeting its customers’ technical requirements in a timely manner and at competitive prices, its products may become obsolete and its financial condition and results of operations may suffer

Advantest sells its products to several industries that are characterized by rapid technological changes, frequent introduction of new products and services, varying and unpredictable product lifecycles and evolving industry standards. Advantest anticipates that future demand for its products will be driven, in large part, by technological innovation in semiconductor technology, which creates new testing requirements that are not adequately addressed by currently-installed semiconductor test systems. Customer needs in response to these technological innovations, and their need for greater cost-effectiveness and efficiency to respond to the market environment, include:

  • test solutions of non-memory semiconductors that incorporate more advanced memory semiconductors, logic and analog circuits;
  • test solutions of power semiconductors that control small and large motor drives;
  • solutions for complexed IC incorporating RF, logic and memory chips in a single package in order to achieve IC with advanced 3D integration as well as downsizing and technical advantages, through TSV technology;
  • mechatronics-related products which transport devices faster, more accurately and more stably;
  • test solutions of testing technologies that employ self-test circuit designs incorporated into semiconductor chips;
  • test solutions of testing technologies that employ test circuit designs for Device Under Test (DUT);
  • test solutions of system level testing that guarantees performance of the final products;
  • introduction of mechatronics products that respond to reduced testing time resulting from advances in customers’ back-end testing;
  • prompt response and quick repair in the event of failure;
  • total solutions that allow customers to reduce their testing costs; and
  • solutions for measurement and observation of state-of-the-art photomasks and wafer.

 

Advantest also believes demand for its products, including semiconductor and component test systems, is affected by the level of demand for personal computers, high-speed wireless and wireline data services, digital consumer products and communication devices, such as smartphones and wearable devices, and data servers. It is likely that advances in technologies used in those products and services will require new testing systems. Without the timely introduction of semiconductor test systems capable of effectively testing and measuring equipment that use these new technologies, Advantest’s products and services may become technologically obsolete over time.

A failure by Advantest to meet its customers’ technical requirements at competitive prices or to deliver conforming equipment in a timely manner may result in its products being replaced by those of a competitor or an alternative technology solution. Furthermore, Advantest’s inability to secure sufficient personnel appropriate for the business during a period of recovery or its inability to provide a product that meets requested performance criteria at an acceptable price when required by its customers would severely damage its reputation with such customers and may adversely affect future sales efforts with respect to such customers.

Advantest’s dependence on a sole source or a limited number of suppliers for its components and parts may prevent it from delivering its products on a timely basis or its failure to meet the demand for its products upon a sudden expansion of the markets may adversely affect its future market share and financial results

Advantest relies on suppliers to perform some of the assembly requirements for its products. In addition, many of the components used in Advantest’s semiconductor and component test systems and mechatronics systems are produced by suppliers based on Advantest’s specifications. Advantest’s reliance on these suppliers gives it less control over the manufacturing process and exposes it to significant risks, especially inadequate manufacturing capacity, late delivery, substandard quality, lack of labor availability and high costs. In addition, Advantest depends on a sole source or a limited number of suppliers for a portion of its components and parts. Advantest does not maintain long-term supply agreements with most of its suppliers, and it purchases most of its components and parts through individual purchase orders. If a supplier becomes unable to provide components or parts in the volumes needed and at acceptable prices, or if a supplier withdraws from business thereby stopping production or sales of custom or general components and parts that Advantest uses or will use in the future, or a large scale natural disaster or electricity shortage occurs, Advantest would have to identify and procure acceptable replacements. Advantest may lose its capacity to supply test systems if it becomes unable to procure acceptable replacements. Suppliers have typically adjusted their production capacity through the reduction of production lines and personnel. Therefore, if the market for semiconductor and component test systems and mechatronics systems were to suddenly expand, Advantest would require significant increases in production capabilities including personnel, as well as materials, components and supplies from suppliers, in order to fully capitalize on such expansion. Furthermore, the markets for semiconductors and other specialized components have, in the past, experienced periods of inadequate supply to meet demand. Moreover, there may be a shortage of components if a large scale natural disaster or electricity shortage occurs. The process of selecting suppliers and of identifying suitable replacement components and parts is lengthy and may result in Advantest being unable to deliver products meeting customer requirements in a timely manner. Advantest has, in the past, been unable to deliver its products according to production schedules primarily due to the inability of suppliers to supply components and parts based on Advantest’s specifications and by other shortages in components and parts. Moreover, a deterioration in the financial position of Advantest’s suppliers reflecting the decline in the economic environment or the failure of Advantest to adjust to large increases in demand for its products during the period of recovery in demand could result in Advantest losing one or more of its existing large-volume customers or losing the opportunity to establish a strong relationship with potential large-volume customers with which it currently does little or no business. Such failure may adversely affect Advantest’s future market share and its financial results.

Advantest faces substantial competition in its businesses and, if Advantest does not maintain or expand its market share, its business may be harmed

Advantest faces substantial competition throughout the world. Advantest’s primary competitors in the semiconductor and component test system market include, among others, Teradyne, Inc., Xcerra Corporation, UniTest Inc. and EXICON Ltd. In the mechatronics system related market, Advantest also competes with Delta Design, Inc., TechWing, Inc. and Seiko Epson Corporation in test handler devices, and with TSE Co., Ltd., Semes Co., Ltd., SL-link Co., Ltd. and TechWing, Inc. in device interfaces. Some of Advantest’s competitors have greater financial and other resources than Advantest.

Advantest faces many challenges in its businesses, including increased pressure from customers to produce semiconductor and component test systems and mechatronics systems that reduce testing costs or from customers who have developed internal test solutions. For device interfaces, acquisition of vendors that supply core technical components by Advantest’s competitors, or leakage of the manufacturing technology of printed circuit boards, may result in reduced testing costs by customers or difficulty by Advantest to realize its products’ full performance.

To compete effectively and maintain and expand its market share, Advantest must continue to enhance its business processes to lower the cost of its products, or introduce enhancements that lower overall testing costs. Advantest also expects its competitors to continue to introduce new products with improvements in price and performance, as well as increasing their customer service and support offerings, and Advantest expects new market participants to launch low-price testers. Significant increases in competition may erode Advantest’s profit margin and weaken its earnings.

Advantest may not be able to meet the targets set in its strategies and medium-term business plan

The attainment of goals such as those in medium-term business plans is subject to various internal and external factors, including the general economic and market conditions in which Advantest and its customers operate, the level of competition, the level of corporate capital expenditure, the level of demand for Advantest’s products and fluctuations in exchange rates. As a result, any strategies and medium-term business goals and targets (as amended from time to time) should not be treated as forecasts of future results. There can be no assurance that Advantest’s strategies to accomplish medium-term business plans and implementation of such strategies will be successful, that the implementation of its strategies will have the intended effects, that the medium-term business plan or other targets (whether quantitative or qualitative, and as amended from time to time) will be met, or that such goals, targets and aims will not be changed in the future by Advantest’s management.

Advantest’s largest customers currently account for a significant part of its net sales and, in addition to the risk of Advantest’s business being harmed by the loss of one or more of these customers or changes in their capital expenditures, Advantest may not be able to recover its accounts receivables if its largest customers experience a deterioration in their financial position

Advantest’s success depends on its continued ability to develop and manage relationships with its major customers. A small number of such major customers currently account for a significant portion of its net sales. Sales to Advantest’s five largest customers accounted for approximately 38% in fiscal 2015 and approximately 32% in fiscal 2016. The loss of one or more of these major customers, changes in their capital expenditures or failure of their main products could materially harm Advantest’s business. Furthermore, if Advantest’s major customers experience deterioration in their financial position and are unable to fulfill their payment obligations to Advantest in accordance with the applicable terms, Advantest’s business, results of operations and financial position may be adversely affected.

Advantest’s product lines are facing significant price pressure

Price pressure on Advantest’s businesses is adversely affecting Advantest’s operating margins. Irrespective of the trend in the demand for semiconductors, there is ongoing price pressure on semiconductors, which puts continuous pressure on the market price for products in the Semiconductor and Component Test System Segment and Mechatronics System Segment. During periods when there is rapid decrease in semiconductor prices, semiconductor manufacturers, foundries and test houses, which are Advantest’s customers, seek to increase their production capacities while minimizing their capital expenditures. In addition, increased competition in the market for digital consumer products, personal computers, mobile devices such as smartphones and wearable devices, and data servers have driven down prices of these goods, subsequently creating significant price pressure on Advantest’s product lines. If prices of semiconductors continue to decline, customers may postpone capital expenditures on new equipment by remodeling or adapting the usage of existing equipment. If price pressure further increases in the future, Advantest’s financial condition and results of operations may be adversely affected.

Fluctuations in exchange rates could reduce Advantest’s profitability

The majority of Advantest’s net sales are derived from products sold to customers located outside of Japan. Of Advantest’s fiscal 2016 net sales, 88.2% were from products sold to overseas customers. Approximately 72% of Advantest’s net sales in fiscal 2016 were derived from currencies other than the Japanese yen, predominantly the U.S. dollar. If the Japanese yen becomes strong relative to foreign currencies (mostly the U.S. dollar and, to a much lesser extent, other currencies), it would increase the prices of Advantest products as stated in U.S. dollars and in those other currencies, which could hurt sales in those countries.

With respect to the Euro, if the Japanese yen weakens, there may be a negative impact on Advantest’s profitability since there are currently more costs incurred in Euro than net sales derived in Euro.

In addition, significant fluctuations in the exchange rate between the Japanese yen and foreign currencies, especially the U.S. dollar, could require Advantest to lower its prices with respect to foreign sales of its products that are priced in Japanese yen, and reduce the Japanese yen equivalent amounts of its foreign sales for products that are based in U.S. dollars or other foreign currencies, thereby reducing its profitability overall. These fluctuations could also cause prospective customers to push out or delay orders because of the increased relative cost of Advantest’s products. In the past, there have been significant fluctuations in the exchange rate between the Japanese yen and the foreign currencies in which Advantest’s sales are denominated.

Furthermore, Advantest’s consolidated financial statements for a particular period or for a particular date will be affected by changes in the prevailing exchange rates of the currencies in which subsidiaries of Advantest prepare their financial statements against the Japanese yen. Foreign exchange rate fluctuations may have an effect on those amounts not denominated in yen which are translated into yen for Advantest’s consolidated financial statements, and depending on the direction of the foreign exchange fluctuation, it may have an adverse effect on Advantest’s reported financial position, results of operations and net assets.

Advantest may not recoup costs incurred in the development of new products

Enhancements to existing products and the development of new generations of products are, in most cases, costly processes. Furthermore, because the decision to purchase semiconductor and component test systems products and mechatronics systems generally involves a significant commitment of capital, the sale of this equipment typically involves a lengthy sales period and requires Advantest to expend substantial funds and sales efforts to secure the sale. Advantest’s enhancements or new generations of products may not generate net sales in excess of development and sales costs if, for example, these new enhancements or products are quickly rendered obsolete by changing customer preferences, the introduction by Advantest’s competitors of products embodying new technologies or features, the introduction by Advantest’s customers of new products that require different testing functions or the failure of the market for Advantest’s customer’s products to grow at the rate, or to the levels, anticipated by Advantest. In some cases, Advantest must anticipate industry trends and develop products in advance of the commercialization of its customers’ products. This requires Advantest to make significant investments in product development well before it determines the commercial viability of these innovations. If Advantest’s customers fail to introduce their devices in a timely manner or the market rejects their devices, Advantest may not recover its investments in product development through sales in significant volume.

The market for Advantest’s major products is highly concentrated, and Advantest may not be able to increase sales of its products because of limited opportunities

The market for test systems for memory semiconductors in the Semiconductor and Component Test System Segment is highly concentrated, with a small number of large semiconductor manufacturers, foundries and test houses accounting for a large portion of total sales in the semiconductor and component test system industry. Advantest believes that this market concentration could become even more severe in the future as larger semiconductor device manufacturers, foundries and test houses acquire smaller semiconductor market participants, and as corporate restructuring, such as elimination and consolidation of businesses, progresses. Advantest’s ability to increase sales will depend in large part upon its ability to obtain or increase orders from large-volume customers. Furthermore, in the event there is an over-supply of semiconductor and component test system products on the second-hand market reflecting, among others, restructuring within the industry, or delay to meet the specific needs of Advantest’s customers, Advantest faces an additional risk of losing its sales opportunities.

Advantest may be required to record a significant impairment charge which could have a material adverse effect on Advantest’s financial condition and results of operations.

If there is any indication of impairment for Property, plant and equipment, the asset is tested for impairment. Goodwill is tested for impairment both annually and when there is any indication of impairment. An impairment loss is recognized if the recoverable amount of an asset, cash-generating unit (CGU) or CGU group is less than its carrying amount. Therefore, depending on the expected future cash flow of property, plant and equipment or business operations to which goodwill relates, Advantest may be required to record a significant impairment charge, which could have a material adverse effect on Advantest’s financial condition and results of operations.

If Advantest’s main facilities for research and development, production or information technology systems for its businesses, or the facilities of its subcontractors and suppliers, were to experience catastrophic loss, its results of operations would be seriously harmed

Advantest’s main facilities for research and development for its Semiconductor and Component Test Systems and Mechatronics System Segments production, as well as Advantest’s service bases, are located in Gunma Prefecture, Saitama Prefecture and Miyagi Prefecture in Japan. In addition, the main system server and the network hub are maintained in system centers approved by the Information System Management System, or ISMS, and local network servers are located in certain operations offices in Japan.

Japan is a region that is susceptible to frequent earthquakes. If Advantest’s facilities, particularly its semiconductor and component test system manufacturing factories, were to experience a catastrophic loss from, but not limited to, earthquakes, it would materially disrupt Advantest’s operations, delay production, shipments and revenue, and result in large expenses to repair or replace the facilities. Advantest has insurance to cover most potential losses at its manufacturing facilities, other than those that result from earthquakes. However, this insurance may not be adequate to cover all possible losses. Similar disruptions to Advantest’s business may occur if the facilities of Advantest’s subcontractors and suppliers or if the facilities of Advantest’s information system network were to experience a catastrophic loss.

Advantest has prepared itself for crises such as large-scale natural disasters, and each department of Advantest has documented its own disaster-response procedures and manuals. Furthermore, in order to prevent any disruption of its core businesses, or in case of suspension, to re-start the suspended businesses, including the recovery of important facilities, in the shortest possible time, Advantest formulated and implemented a “Business Continuity Plan.” However, if such Business Continuity Plan is not effective, Advantest’s core businesses could be disrupted at a time of crisis, such as large-scale natural disasters, and could take a substantial amount of time to recover.

Advantest’s business is subject to economic, political and other risks associated with international operations and sales

Advantest’s business is subject to risks associated with conducting business internationally because it manufactures and sells its products, and purchases parts and components from, around the world. In fiscal 2016, 73.2% of Advantest’s total net sales came from Asia (excluding Japan), a majority of which consisted of sales in Taiwan, the People’s Republic of China (“China”) and Korea, 9.5% from the Americas and 5.5% from Europe. Advantest anticipates that net sales from international operations will continue to represent a substantial portion of its total net sales. In addition, some of the Company’s distribution and support subsidiaries are located in the Americas, Europe, and Asian countries, including Taiwan, Singapore, Korea and China, and some of Advantest’s suppliers and factories are also located overseas, such as Korea and Malaysia. Accordingly, Advantest’s future results could be harmed by a variety of factors, including:

  • political and economic instability, including economic and political disruptions, disputes, natural calamities, epidemics or other risks related to countries where Advantest procures its components and parts or manufactures and sells its products;
  • trade protection measures and import or export licensing requirements;
  • potentially negative consequences from changes in tax laws;
  • risks with respect to international taxation, including transfer pricing regulations;
  • difficulty in staffing and managing widespread operations;
  • differing protection of intellectual property;
  • difficulties in collecting accounts receivable because of distance and different legal rules;
  • risks with respect to social and political crises and issues resulting from, among others, terrorism, war and deterioration in the political and/or economic relationships between Japan and other countries;
  • risks with respect to decline in the quality of procurement and manufacturing where Advantest’s suppliers or manufacturing facilities are located in countries that do not have developed infrastructures in mechanical processing and assembly; and
  • risks with respect to increases in cost, delays in delivery or expenses in repairing products where low quality and counterfeit products are mixed into the supply chain.

 

Advantest may not be able to recover its capital expenditures

Advantest continues to make capital expenditures. From fiscal 2012 through fiscal 2013, Advantest built a new factory in South Korea in order to increase its share of sales to major Korean customers. The factory began operating in May 2013. Advantest may not be able to recover the capital expenditures for such projects within the assumed timeframe, or at all, if it cannot achieve the assumed volume of sales due to customers cutting back on capital expenditures or if intense competition with competitors results in a reduction in unit prices. In such event, the asset would be subject to impairment, which may have an adverse impact on Advantest’s profitability.

Advantest’s business may be negatively affected by factors relating to its marketing and sales capabilities and its branding

Advantest’s business may be negatively affected by factors relating to its marketing and sales capabilities and its branding, including:

  • the long selling process involved in the sale of semiconductor and component test systems and mechatronics system;
  • the relatively small number of total units sold in the semiconductor and component test system and mechatronics system market;
  • order cancellations or postponement of capital expenditures by customers;
  • delays in collection of accounts receivable, increases in losses resulting from bad debt or increases in provisions for doubtful receivables, reflecting the financial condition of customers;
  • increases in required provisions for product warranty costs and write-downs of inventory; and
  • any real or perceived decrease in performance and reliability of Advantest products, which could lead to a decline in Advantest’s reputation.

 

Chemicals used by Advantest may become subject to more stringent regulations, and Advantest may be required to incur significant costs in adapting to new requirements

Advantest uses chemicals in the manufacturing of its products, the manufacture, processing and distribution of which are subject to environmental related laws, regulations and rules of Japanese governmental agencies, as well as by various industry organizations and other regulatory bodies in other countries. These regulatory bodies may strengthen existing regulations governing chemicals used by Advantest and may also begin to regulate other chemicals used by Advantest. While Advantest is taking measures to eliminate toxic substances included in parts used to manufacture its products, Advantest uses solder, which contains lead for mounting electronic parts and components for its products except for some of them, in order to ensure the reliability of its products as a matter of priority. Further, as a method to cool some of its semiconductor and component test systems and mechatronics systems, Advantest uses fluorinated liquid which use is not currently regulated by laws. Advantest believes that it is in compliance with regulations with respect to the use of chemicals by promoting environmental policies for its products with the focus on ensuring the safety and the reliability of its products; however, Advantest must be prepared to adapt to regulatory requirements in all relevant countries as requirements change. Advantest may be required to incur significant cost in adapting to new requirements. Any failure by Advantest to comply with applicable government or industry regulations could result in restrictions on its ability to carry on with or expand sales of its products.

Advantest could suffer significant liabilities, litigation costs or licensing expenses or be prevented from selling its products if it is infringing on the intellectual property of third parties

Advantest may be unknowingly infringing on the intellectual property rights of third parties and may be held responsible for that infringement. To date, Advantest has not been the subject of a material intellectual property claim. However, any future litigation regarding patents or other intellectual property infringement could be costly and time consuming and divert management and key personnel from Advantest’s business operations. If Advantest loses a claim, it may be forced to pay significant damages, pay license fees, modify its products or processes, stop making products or stop using processes. A license could be very expensive to obtain or may not be available at all. Changing Advantest’s products or processes to avoid infringing on the rights of third parties may be costly or impractical.

Advantest may be unable to protect its proprietary rights due to the difficulty of Advantest gaining access to, and investigating, the products believed to infringe on Advantest’s intellectual property rights

Advantest relies on patents, utility model rights, design rights, trademarks and copyrights obtained in various countries to actively protect its proprietary rights. For instance, with respect to the device interface market, Advantest has taken legal action based on its patent and utility model rights against manufacturers that sell replicas of Advantest’s products and, in some instances, has obtained injunctions against sales of such replicas. However, in general, it is difficult for Advantest to gain access to, and investigate, the products believed to infringe on its intellectual property rights. Therefore, Advantest cannot ensure that its intellectual property rights will provide meaningful protection of its proprietary rights. Nevertheless, Advantest is focused on protecting its intellectual property rights from third party infringement and will continue to monitor and enforce its rights.

The technology labor market is very competitive, and Advantest’s business may suffer if Advantest is unable to hire and retain engineers and other key personnel

Advantest’s future success depends partly on its ability to attract and retain highly qualified engineers for its research and development and customer service and support divisions. If Advantest fails to hire and retain a sufficient number of these personnel, it may not be able to maintain and expand its business. Advantest may need to revise its compensation and other personnel related policies to retain its existing officers and employees and attract and retain the additional personnel that it expects to require.

Damage, interference or interruption to Advantest’s information technology networks and systems could hinder business continuity and lead to substantial costs or harm Advantest’s reputation

Advantest relies on various information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, including confidential data, and to carry out and support a variety of business activities, including manufacturing, research and development, supply chain management, sales and accounting. Advantest has the Information Security Committee and Legal Department to create policies on information security measures. The IT section builds and operates the information and technology network and system based on the above-mentioned policies. However, attacks by hackers or computer viruses, wrongful use of the information security system, careless use, accidents or disasters could undermine the defenses established by Advantest and disrupt business continuity, which could not only risk leakage or tampering of information but could also result in a legal claim, litigation, damages liability or an obligation to pay fines. If this were to occur, Advantest’s reputation could be harmed, Advantest could incur substantial costs, and it may have a material adverse effect upon Advantest’s financial condition and results of operation.

Product defects and any damages stemming from Advantest’s product liability could harm Advantest’s reputation among existing and potential customers and could have a material adverse effect upon Advantest’s business results and financial condition

Advantest manufactures its products in accordance with internationally accepted quality control standards such as ISO 9000. However, Advantest cannot guarantee that there are no defects in its products. Advantest maintains product liability insurance, but cannot guarantee that such insurance will sufficiently cover the ultimate amount of damages with respect to Advantest’s liabilities. Therefore, shipping stoppage and delivery delay due to quality defects of parts or manufacturing defects of products, large scale accidents due to product defects or any discovery of defects in its products could harm Advantest’s reputation for not adequately addressing defects, could cause Advantest to incur higher costs, could result in claims for damages and could have a material adverse effect upon Advantest’s business results and financial condition.