YKT CORPORATION

The end demand for the Group's principal products—electronic devices and machine tools—comes from manufacturing industries such as electrical equipment, machinery, tools, and automobiles, and capital expenditure demand in these industries is a major factor causing variability in operating results. In the fiscal year under review, export sales of electronic devices increased due to expanding capital expenditure demand in the Chinese market, while import sales of machine tools remained sluggish due to geopolitical risks in the cutting tool industry and weak domestic demand. As countermeasures, the Group continues to enhance its sales capabilities and technical service capabilities, and continues proposal activities addressing customers' needs for efficiency improvement and labor savings.

The export destinations for electronic devices are mainly users in East Asia (Taiwan and China), and because these customers have large-scale production facilities, transactions often involve large capital expenditure projects. On the other hand, there is a risk that capital expenditure could fluctuate significantly due to global economic trends. The Group addresses this through coordination with overseas consolidated subsidiaries to grasp market trends, optimization of product inventory, and thorough receivables management.

Machine tools and industrial machinery are purchased in foreign currency from overseas manufacturers, so exchange rate fluctuations directly affect costs. In the fiscal year under review, the continued depreciation of the yen against European currencies led to sustained cost increases for imported products, resulting in a decline in sales of imported machinery and an overall decline in profit margins. The Group seeks to reduce foreign exchange risk through the use of forward exchange contracts and short-term settlement, but has determined that measures anticipating unprecedented large-scale exchange rate fluctuations are necessary.

Sales of electronic devices are primarily based on an agency agreement with Panasonic Connect Co., Ltd. and its group, and the sales ratio of products from that group accounts for more than half of the Group's net sales. Import sales of machine tools and measuring instruments are also primarily conducted under exclusive agency agreements with suppliers. If such contracts are terminated or business is scaled down due to changes in the business plans of these companies, it could adversely affect the Group's business and operating results. The Group aims to reduce excessive dependence by improving its sales capabilities and technical capabilities as an agency and by developing new fields and products.

To fund the construction of its head office building, the Group has entered into a term loan agreement with a commitment period with Mizuho Bank, Ltd. and MUFG Bank, Ltd., and each agreement includes a net assets maintenance covenant (requiring maintenance of at least 75% of the base net assets). If business performance deteriorates due to worsening market conditions, there is a risk of breaching this financial covenant. As of the end of the fiscal year under review, there was no breach of the covenant, and the Group continues to work to secure stable business performance by improving profit margins.

The Group applies tax effect accounting and records deferred tax assets, the calculation of which is based on estimates and assumptions regarding future taxable income. If actual taxable income deviates from these estimates and assumptions, all or part of the deferred tax assets may be judged unrecoverable, resulting in a write-down. A write-down of deferred tax assets could affect the Group's business results and financial position.