PEGASUS CO., LTD.

The majority of the Group's sales and manufacturing activities depend on overseas operations, and the countries in which the Group conducts business include some that are politically, geopolitically, or economically unstable. If labor disputes, terrorism, war, currency crises, natural disasters, or similar events occur, the management of overseas operations could become difficult, potentially affecting the Group's financial position and operating results. The Group continuously collects and analyzes information through its own network, including each of its overseas sites, in an effort to reduce this risk.

For both the Apparel Machinery Business and the Automotive Business, China and Vietnam are important manufacturing bases. Changes in political and economic conditions, differences in laws and regulations, natural disasters, deterioration in power supply conditions, and similar events could disrupt production activities. To diversify this risk, the Group has established a three-country structure for the Apparel Machinery Business (Japan, China, and Vietnam) and for the Automotive Business (China, Vietnam, and Mexico), and has also taken out overseas investment insurance with Nippon Export and Investment Insurance (NEXI), an incorporated administrative agency. The Group is also developing systems that enable production to be supplemented or transferred between sites.

Price competition for automotive parts is intensifying, particularly in the Chinese market, and the impact of price reductions by finished vehicle manufacturers is spreading to the Group through Tier 1 manufacturers, resulting in declines in unit selling prices and increases in the cost ratio. This structural price decline is particularly evident in China and Vietnam, raising concerns about the impact on order volumes, net sales, and other factors. The Group is working to maintain competitiveness by strengthening relationships with customers, maintaining and improving quality, reducing the cost ratio through automation, and developing new customers.

Because the product lineup is specialized in Industrial Sewing Machines (Chain Stitch Sewing Machines), there is a risk that demand will fluctuate due to changes in the state of the apparel industry, consumer behavior, and fashion trends. If changes in the quality, price, and delivery times of overseas-manufactured products, or changes in the production policies of the apparel industry, result in the Company's products and technologies failing to meet customer needs, this could affect the Group's sales strategy and business development. The Group works closely with production sites in Japan and overseas, continuously striving to upgrade and improve its technologies and products.

Due to the Group's global business operations, many transactions are denominated in currencies other than the yen, and fluctuations in exchange rates used to translate figures into yen when preparing the consolidated financial statements could affect the Group's financial position and operating results. For transactions denominated in foreign currencies, the Group may take risk mitigation measures such as impact loans.

Because the Group primarily raises funds at variable interest rates, there is a risk that interest expenses will increase if market interest rates rise. In addition, significant changes in financial markets could worsen fundraising conditions, and fluctuations in financial markets could also increase the unfunded pension obligation amount and pension liabilities. The Group seeks to reduce this risk by diversifying its fundraising methods, including entering into syndicated commitment line agreements.

The distribution in the market of counterfeit products imitating the Company's product appearance, brands, and proprietary technologies by third parties could reduce market competitiveness and adversely affect earnings. In addition, if patent applications are not approved or if measures to protect rights are not effective, there is a risk that the Company will find itself in competition with similar products. The Group addresses this risk by conducting clearance investigations at the product development stage and by actively securing patent, design, and trademark rights.

While no serious product defect incidents have occurred in the past, if a recall or product liability claim occurs in the future, this could affect not only the Group's financial position and operating results but also its brand image. Although the Group has product liability insurance, there is no guarantee that this will be sufficient to cover the final amount of damages, and it may not be possible to renew the insurance on economically reasonable terms. The Group works to improve quality by thoroughly implementing quality control standards at each stage of design, manufacturing, and shipment, and by feeding back market quality information into the design and manufacturing processes.

The Group is subject to a variety of tax systems and regulations both in Japan and overseas, and there is a risk that regulations will be tightened or new legal regulations will be applied due to changes in social conditions in each country. Differences in views with tax authorities in various countries could result in additional tax assessments, which could affect the Group's financial position and operating results. The Group files appropriate tax returns and pays taxes in compliance with the tax laws of each country, and works to appropriately address international tax risks, including those related to transfer pricing taxation.

Given the Group's business structure, which relies heavily on overseas operations, it is essential to secure and develop highly specialized engineers as well as personnel skilled in global management strategy and organizational operation. However, if the declining working population due to the falling birthrate and aging population makes it difficult to secure and develop such personnel, this could affect business activities over the long term. The Group is working to improve job satisfaction and retain personnel by promoting new graduate and mid-career hiring, appointing local employees to executive positions, and reviewing its compensation system, among other measures.