Howa Machinery, Ltd.

Sales of the company's mainstay product, dedicated machining lines for automotive parts, fluctuate significantly depending on the timing of line renewals associated with automobile model changes, etc. If structural changes in the automotive industry driven by the advancement of CASE progress rapidly, or if capital expenditure is restrained due to uncertainty over the direction of next-generation vehicles, this could adversely affect business performance and financial condition. The Group is addressing this by allocating management resources in response to changes in the business environment and building a niche-top structure based on its medium-term management plan.

U.S. tariff policy affects the earnings and cost structure of Japanese automakers, and may lead to restraint or postponement of automotive-related capital expenditure. This poses a risk of decreased demand for special-purpose machine tools among automotive parts manufacturers, which are major customers. In addition, for civilian-use Sporting Rifles (for Overseas Markets), there is a possibility of reduced competitiveness and lower sales in the U.S. market due to increased reciprocal tariffs.

In the machine tool business for overseas markets, centered on Asia, local business activities may be affected by political and economic factors, as well as social disruptions such as wars, riots, terrorism, epidemics, and strikes. In addition, prolonged geopolitical risk, including in the Middle East region, poses a risk of disruption to the procurement of key raw materials and auxiliary materials for Special-Purpose Vehicles. These factors could adversely affect business performance and financial condition.

The Firearms business (small arms for the Ministry of Defense) is entirely dependent on the Ministry of Defense's equipment procurement budget, and depending on the execution status of that budget, business performance and financial condition could be adversely affected. Similarly, in the Building Materials business (Soundproof Sashes for the Ministry of Defense), there is a risk of decreased sales if the soundproofing construction budget is reduced due to the reorganization of contour areas resulting from fighter aircraft redeployment or revisions to specifications. Both businesses combined result in a structure with high dependence on the Ministry of Defense.

Civilian-use Sporting Rifles are highly dependent on the U.S. market and are transacted in U.S. dollars, so a sharp appreciation of the yen against the dollar due to geopolitical risk or other factors could adversely affect business performance and financial condition. Stagnant demand in the U.S. market is also a risk factor for declining sales. While the company addresses product liability risk through insurance coverage, there is no guarantee that insurance will sufficiently cover losses in the event of a serious accident.

Road Sweepers are affected by changes in safety standards resulting from the promotion of international harmonization of automobile standards and mutual recognition of certifications, and the company bears research and development and investment costs to ensure legal compliance. Future regulatory tightening could result in cost burdens exceeding current expectations. In addition, if the trend toward decarbonization, such as EV adoption, in the domestic market progresses more rapidly than expected, this could also adversely affect business performance and financial condition.

The company currently has businesses with low profitability, and if strengthening and improvement measures based on the medium-term management plan do not progress as expected, impairment losses on fixed assets due to declining profitability may occur in each asset group, adversely affecting business performance. The Management Meeting, which also serves as the Risk Management Committee, verifies risks and determines response policies.

If cost increases due to rising prices of raw materials, etc. cannot be offset by internal cost reductions, or cannot be sufficiently passed on to product prices, business performance and financial condition could be adversely affected. Regarding inventories, there is also a risk of valuation losses arising from excess inventory buildup beyond appropriate levels if the company is slow to respond to a sharp deterioration in the supply-demand balance.

Most of the Group's manufacturing is concentrated at the head office plant in Aichi Prefecture, and if a large-scale natural disaster such as an earthquake or flood occurs in the region, operations would be suspended until recovery, significantly reducing production capacity. The geographic concentration of manufacturing bases represents a vulnerability in business continuity, and could have a significant adverse effect on business performance and financial condition.

Some borrowings are subject to financial covenants related to net assets and ordinary profit/loss, and if these covenants are violated due to deteriorating performance, the company could lose the benefit of term extension, adversely affecting its financial position and business results. In addition, there are risks of increased retirement benefit expenses and obligations due to declines in the market value of pension assets, lower investment yields, changes in discount rates, etc., as well as risks of reduced recoverability of deferred tax assets.