TOKUDEN CO., LTD.

In the event of a natural disaster such as an earthquake or a factory accident, sales may be adversely affected through reduced production capacity or damage to creditworthiness. The Group has implemented measures such as diversifying domestic production sites, conducting equipment inspections, and installing safety devices and fire-extinguishing equipment; however, these measures cannot completely eliminate the risk.

In FY2026 (ending March 2026), the top 10 customers accounted for 51.8% of net sales, with the steel and automotive industries ranking among the top, creating a risk that a deterioration in capital expenditure demand in these industries could lead to reduced orders or requests for price reductions. The Group seeks to diversify this risk through sales expansion into other industries and the development of new technologies and products, but its performance remains strongly influenced by customers' investment trends.

The proportion of raw material purchases accounted for by Showa KDE Corporation, the processing subcontractor for mixed powder, was as high as 33.3% in FY2026 (ending March 2026). If stable procurement from this company were to be interrupted, securing an alternative supplier could take time and disrupt production. There is also a risk of leakage of proprietary technology and know-how, which could lead to a decline in market share due to the introduction of competing products. The Group addresses this through basic agreements and confidentiality memoranda, but the risk cannot be completely eliminated.

Some Welding Materials have been outsourced for manufacturing to Nikko Yozai Kogyo Co., Ltd. since 1980, and the proportion of purchases from this company out of total merchandise purchases was 12.7% in FY2026 (ending March 2026). If procurement from this company were to be interrupted, securing an alternative manufacturing subcontractor could take time, potentially resulting in lost sales opportunities and affecting the Group's supply responsibilities to customers. The Group seeks stable procurement by strengthening the relationship through basic agreements and confidentiality memoranda, but the risk of dependence on a single subcontractor remains.

The Group relies on subcontractors for machining, heat treatment, welding work, and other processes. If a subcontractor is unable to maintain the necessary technical or economic resources, or if the Group is unable to secure a capable subcontractor in a timely manner, quality, delivery times, and costs could be adversely affected. The Group strives to manage subcontractors' quality and delivery performance and to secure and develop capable subcontractors, but risks arising from external factors such as a subcontractor's business condition or labor shortages cannot be eliminated.

In recent years, raw material prices for products and merchandise have tended to rise, and if prices were to surge significantly going forward, it may become difficult to pass on the increase to sales prices in a timely and appropriate manner, potentially putting pressure on earnings. The Group requests price pass-through to customers and implements productivity improvements and cost reductions, but the risk remains that pass-through may not be sufficiently achieved depending on market conditions.

If a significant deterioration in the business environment or other factors reduces the profitability of a business such that the recovery of invested amounts is no longer expected, impairment losses may be recognized on the Group's fixed assets, which could have a material impact on operating results and financial position. The application of impairment accounting can result in the recognition of a large loss on a one-time basis, creating a risk of erosion of equity capital.

Deferred tax assets are recognized based on reasonable estimates of future taxable income; however, if the estimated amount decreases due to changes in the business environment or other factors, recoverability may decline, and the reversal of deferred tax assets could affect operating results and financial position. Because estimates of taxable income involve uncertainty, this could become an additional source of loss in a downturn in business performance.