TODA KOGYO CORP.

Unforeseen changes in domestic and international political and economic conditions, such as prolonged instability in the Middle East and the intensification of China's export controls, could disrupt supply chains and prolong global trade friction, potentially having a material impact on the Group's cash flow environment, financial position, and business performance. The Group is strengthening its profit structure through cost structure slimming and diversification of production sites and material procurement; however, given its global operations, it is difficult to fully address geopolitical risks.

Some raw materials depend on a limited number of supply countries and suppliers that are difficult to substitute, and supply disruptions or quality defects could occur due to export/import regulations, environmental regulations, or supplier disasters or accidents. The Group also faces supply uncertainty and significant price increases for petroleum-related raw materials and fuels stemming from the situation in the Middle East. If fluctuations in purchase prices cannot be fully absorbed through pass-through to sales prices, joint purchasing, or cost reduction activities, this could have a material impact on the financial position and business performance.

Amid changes in regulations across countries and rising customer requirements, particularly for automotive-use products, quality defects or accidents could have a material impact on the financial position and business performance. The Group has implemented measures such as operating under ISO9001 and IATF16949, conducting quality audits by an independent quality assurance department, and strengthening personnel training; however, the continual rise in required standards is increasing this risk.

Amid intensifying changes in the market environment and shortening product life cycles, the Group's competitiveness may decline due to the emergence of low-cost or substitute products from competitors or new products resulting from technological innovation. The Group is focusing its selection and concentration of development themes through the introduction of a stage-gate approach; however, if new product development does not proceed as planned, this could have a material impact on the financial position and business performance.

The Group supplies materials and components for the electronic components and automotive markets, and inventory valuation losses may arise if demand fluctuates due to deterioration in customers' business performance or shifts in their management strategies. The Group also holds substantial fixed assets to improve quality and productivity and to expand its business; if there is a significant decline in fair value or deterioration in business profitability, impairment losses may occur, having a material impact on the financial position and business performance.

The Group faces both transition risks, such as increased tax burdens from carbon pricing and increased capital expenditures associated with the shift to low-carbon equipment and processes, and physical risks, such as damage to buildings and facilities from natural disasters and additional investment needs at coastal business sites due to rising sea levels. The Group has positioned climate change as an important management issue and is proceeding with responses based on the TCFD recommendations; however, tightening regulations and increasingly frequent extreme weather events could have a material impact on the financial position and business performance.

Confidential information held by business partners and within the Group may be leaked, or systems may be shut down, due to external attacks such as virus infections and cyberattacks, or due to internal negligence. The Group has implemented multi-layered technical, physical, human, and organizational countermeasures; however, if such threats materialize, this could have a material impact on the Group's reputation, financial position, and business performance through system outages and other effects.

The Group has 14 overseas affiliated companies and is constantly exposed to foreign exchange risk through the translation of local currency-denominated financial statements into yen, as well as through yen-denominated exports and foreign currency-denominated loans from Japan. The Group has implemented measures such as yen-denominated transactions and settlement through foreign currency deposit accounts; however, if fluctuations in foreign currencies against the yen exceed expectations, this could have a material impact on the financial position and business performance.

The Group has overseas operations in China, other parts of Asia, North America, and Europe, and conflicts, terrorism, deteriorating political conditions, large-scale disasters, pandemics, labor disputes, foreign investment restrictions, and other events could have a material impact on the Group's financial position and business performance. The Group strives for timely and appropriate responses through regular sharing of overseas safety information among its sites; however, heightened geopolitical uncertainty is increasing this risk.

Due to the declining birthrate, aging population, and shrinking labor force intensifying competition for talent, there is a risk that it may become difficult to secure excellent personnel with the management capabilities and expertise necessary for management strategy and global operations. The Group is pursuing year-round recruitment of new graduates and experienced personnel and enhancing tier-specific training programs; however, if efforts to secure and develop human resources do not proceed as planned, this could have a material impact on the financial position and business performance.