SHIMA SEIKI MFG.,LTD.

Changes in consumer lifestyles, sustainability responses, unseasonably warm winters and other weather irregularities, and stagnation in economic activity pose a risk of significant decline in capital expenditure by knit product manufacturers, the Company's primary customers. Competitors are also making rapid technological innovations, and if the Company loses its competitive advantage, this could have a significant impact on its business performance and financial condition. As countermeasures, the Company is working to create new business domains, such as proposing timely and appropriately-sized production utilizing WHOLEGARMENT® Flat Knitting Machines and design systems, and promoting the adoption of knitting in non-apparel industries.

New introductions or changes to regulations by governments and international frameworks around the world, such as reciprocal tariff increases and technology export restrictions stemming from US-China trade friction, could significantly affect the apparel industry's supply chain and capital expenditure trends. The Company Group's overseas sales ratio has remained at around 80%, making its business structure susceptible to trade issues. The Company is working to promptly detect local trends and establish rapid response systems by leveraging its network of local subsidiaries and sales agents around the world.

The Company Group's overseas sales ratio has remained at around 80%, and given the large volume of transactions denominated in foreign currencies other than Japanese yen, sharp fluctuations in exchange rates could impact business performance and financial condition. In particular, during periods of yen appreciation, the yen-converted value of overseas sales decreases, posing a risk of pressure on earnings. As a countermeasure, the Company hedges risk through the use of derivatives such as forward foreign exchange contracts for foreign-currency-denominated trade receivables.

Trade receivables in the Flat Knitting Machine Business are subject to industry-specific business practices involving a long period from raw material procurement to product sales, and since transaction amounts per customer tend to be large in Asian markets, collection risk is high. If a user's cash flow deteriorates due to natural disasters, international conflicts, or other causes, the risk of failure to collect trade receivables may further increase. As countermeasures, the Company implements measures such as securitization of receivables, establishment of collateral, trade insurance coverage, and promotion of payment through installation of PMS (Password Management System) on flat knitting machines.

Due to a lack of compliance awareness among overseas competitors, it may be impossible or only partially possible to fully protect the Company's proprietary technology and know-how through intellectual property rights, and the impact on the business could be significant if counterfeit products enter distribution. In addition, as new risks arise from the expanded use of generative AI and social media, there is a risk of legal disputes and loss of social trust due to findings of infringement of third parties' rights of publicity and other rights. The Company addresses these risks through continuous monitoring for patent infringement by other companies, utilization of information from local subsidiaries and agents in each country, assignment of specialized personnel to the internal legal department, and collaboration with experienced attorneys.

Personnel with a high degree of expertise, creativity, and originality form the foundation of the Company's competitiveness. However, if the outflow of personnel or difficulty in securing excellent talent becomes serious, technology transfer and successor development may not proceed as planned, leading to a decline in product development capability and quality, which could reduce business competitiveness. The impact on business performance and financial condition could be particularly significant if key personnel leave. As countermeasures, the Company is working to enhance in-house training, introduce incentive programs, improve the workplace environment through work-style reforms, diversify recruitment activities, and strengthen the organizational capabilities of the entire group to avoid excessive dependence on specific personnel or organizations.

Cyberattacks from outside the Company, unauthorized access, computer virus infections, human error, equipment malfunctions, and other causes could result in malfunctions of information and communication systems, leading to transaction processing errors or delays and information leaks, which could impact business performance and financial condition. Information systems constitute an important business infrastructure for the Company Group, and the impact of a system failure on business continuity could be extensive. The Company addresses this through the formulation of an information security policy and continuous awareness-raising activities regarding physical and technical measures through its Information Security Committee.

The Company has adopted an integrated system concentrating everything from product development to manufacturing in Wakayama Prefecture, and if a large-scale natural disaster such as an earthquake or storm/flood damage, or an accident such as a factory fire, occurs in this region, there is a risk that the production line could be halted for an extended period. Since the Company operates a daily production system, the impact on business performance would be particularly significant if the stoppage continues. The Company has implemented measures such as taking out various types of insurance, developing a business continuity plan, conducting seismic retrofitting of buildings, conducting emergency drills, and introducing a safety confirmation system; however, if a disaster of a scale exceeding anticipated damage occurs, it could have a material impact on business continuity.

Changes to or new enactment of regulations on greenhouse gas emissions and environment-related laws aimed at achieving a decarbonized society could increase compliance costs and impact business performance and financial condition. In addition, as regulatory tightening progresses regarding "business and human rights," including demands to address conflict minerals and forced labor in the supply chain, failure to take appropriate action could result in risks such as termination of business relationships, administrative penalties, loss of social trust, and loss of business opportunities. The Company addresses this through the operation of an environmental management system, formulation of a human rights policy, and initiatives to reduce CO2 emissions and waste; however, continuous monitoring of regulatory trends is necessary.

If a natural disaster such as an earthquake, typhoon, or tsunami, or a pandemic of an infectious disease occurs, this could disrupt sales activities in the Asian, European, and Middle Eastern markets, the Company's primary sales destinations, and force production restrictions due to parts shortages caused by prolonged suspension of suppliers' operations, potentially having a significant impact on business performance and financial condition. There is also a risk that business activities could be halted due to factory shutdowns if an infectious disease spreads within the Company. The Company addresses this through securing emergency inventory, establishing a stable procurement system through purchasing from multiple suppliers, establishing a crisis management headquarters headed by the President, and developing a remote work system.