ONEX Corporation

If the economic downturn continues due to soaring raw material and energy prices and semiconductor supply shortages in industrial machine tools, automobiles, and construction machinery parts, which account for the majority of sales, significant changes may occur in the market environment. The high degree of dependence on specific industrial sectors increases the risk of business deterioration in the event of demand contraction, raising concerns about the impact on financial position, business results, and cash flows. Although the Company is seeking to reduce this dependence by increasing the proportion of sales to the general industrial machinery sector, structural improvement will take time.

If a large-scale claim for damages arises due to defects in heat treatment processing, there is a possibility that losses may occur that cannot be covered by insurance proceeds. Although the Company implements appropriate quality control under the motto of "Pursuit of Quality," it is difficult to completely eliminate the risk of processing defects. If a claim for damages materializes, it may have a material impact on financial position, business results, and cash flows.

Against the backdrop of a declining working-age population due to Japan's falling birthrate and aging population, securing and training personnel has become a key challenge in the heat treatment processing business, which often involves harsh working environments. The Company has implemented measures such as referral-based recruitment, encouragement of re-employment, and productivity improvement; however, if it is unable to continuously secure human resources and talent, significant disruption to business operations may occur, raising concerns about the impact on financial position, business results, and cash flows.

There is a risk that driver shortages will accelerate due to the "2024 problem" in the logistics industry (overtime work regulations for truck drivers). In addition, sluggish production activity resulting from soaring raw material and energy prices and economic downturns may cause transportation demand for production-related and consumption-related cargo to remain weak. If these factors coincide, it will affect the financial position, business results, and cash flows of the Transportation Business segment.

In response to the continued rise in raw material prices, the Company has implemented measures such as cost reduction through productivity improvement, expense reduction, and review of heat treatment unit prices; however, if prices continue to rise more than expected and price pass-through measures are delayed, profitability may deteriorate. There is a risk that the prolonged high level of energy costs will also compound this, leading to a sustained squeeze on profit margins.

While the Company is working to strengthen its financial structure mainly through the reduction of interest-bearing debt, an increase in interest expenses during periods of rising interest rates may affect financial position, business results, and cash flows. As the normalization of Japan's monetary policy progresses, the risk of rising borrowing costs squeezing profits is increasing.

The Company has established a defined benefit corporate pension plan and a lump-sum retirement benefit plan, and retirement benefit expenses and obligations are calculated based on assumptions such as the discount rate. Changes in assumptions such as the discount rate, deterioration in the investment performance of pension assets, or changes in accounting standards may affect financial position, business results, and cash flows.

Although the Company has established systems to prevent the leakage or misuse of important information obtained in the course of business, it cannot completely eliminate the risk of information leakage due to unforeseen events. If an information leak occurs, it may result in a loss of social trust and substantial response costs, potentially having a material impact on the business.

While the Company complies with environmental regulations at its heat treatment processing sites and in its transportation business, regulations such as greenhouse gas emission controls and CO2 emission reduction requirements tend to be revised and strengthened over time. An increase in costs to comply with stricter regulations may affect financial position, business results, and cash flows, with a particularly significant impact on the Metal Heat Treatment Processing Business, which is an energy-intensive business.

Natural disasters such as earthquakes, floods, fires, and snow damage, as well as the resurgence of COVID-19 or the emergence of new infectious diseases, may cause physical and human damage to the business sites of the Company's group and its business partners. If an infectious disease outbreak becomes prolonged, there is a risk of increased fixed cost burdens (such as labor costs) due to a decline in orders and delays in the recovery of capital expenditure funds. Although the Company has taken measures such as establishing a crisis response headquarters and deploying multi-skilled personnel, it cannot completely avoid the impact on financial position, business results, and cash flows in the event of a severe disaster.