UNION TOOL CO.

PCB Drills (Carbide Drills for Printed Circuit Boards) account for approximately 70% of consolidated net sales, so business performance is significantly affected by production trends in the printed wiring board market. In recent years, while quality and density improvements and expanded applications have progressed, the risk of diversifying and rapidly changing customer demands has also increased. As a countermeasure, the Company is focusing on expanding products targeting different markets, such as Carbide End Mills and Rolling Dies.

The unit price of electronic devices tends to decline consistently, and continuous price-reduction pressure is also being applied to the Company's core product, PCB Drills (Carbide Drills for Printed Circuit Boards). Intensifying price competition could adversely affect both net sales and profit margins. The Company addresses this by strengthening quality, technology, support systems, and supply capacity, as well as developing and launching new products capable of responding to price-decline pressure.

Approximately 90% of consolidated net sales are attributable to Asia, including Japan, so political, economic, and social changes, changes in laws and regulations, and natural disasters in the region directly affect business performance. Amid a continued challenging business environment due to uncertainty in the international situation and a slowdown in the Chinese economy, robust demand is expected for the time being due to a surge in generative AI-related demand. The Company strives for risk management by formulating sales strategies tailored to the characteristics of each country and region.

Laser drilling, an alternative technology to PCB Drills (Carbide Drills for Printed Circuit Boards), enables fine and high-speed processing, and if there is progress in technology and processing machinery and expanded demand for printed wiring boards suited to laser processing, this could lead to a decline in demand for PCB Drills. In recent years, expectations for drill processing have increased due to multilayer structures and the lamination of composite materials, and the Company is strengthening its response through initiatives such as extending tool life and developing high-aspect-ratio products. However, it states that it is difficult to completely avoid the impact of advances in alternative technology.

Mainly in response to robust AI-related demand, the Company has in recent years undertaken unprecedentedly large-scale capital investments. If rapid changes in market conditions or curtailment of customer investment prevent the Company from achieving the initially expected utilization rates and profitability, this could result in increased depreciation burden, a longer investment recovery period, and recognition of impairment losses, which could adversely affect business performance and financial condition. While the Company is strengthening its investment decision-making process and implementing measures to improve utilization rates and production, it states that it is difficult to eliminate all investment risk.

When translating foreign-currency-denominated sales and the financial statements of overseas subsidiaries prepared in local currencies into yen, sudden fluctuations in exchange rates could affect consolidated business performance. The Company has established a monitoring system that sets assumed exchange rates when formulating management plans and budgets and verifies and analyzes discrepancies with actual rates on a quarterly basis.

The majority of the Company's in-house machinery and equipment manufacturing and the majority of its technology development are concentrated at the Nagaoka Plant in Nagaoka City, Niigata Prefecture, so any changes or disruptions to the geographical environment or logistics network in the area could have a material impact on business performance. While Nagaoka City has completed development of a road network equipped with snow-melting pipes and has advanced disaster preparedness, the Company's Nagaoka Plant is also strengthening its preparedness by advancing measures against flood damage caused by heavy rain.

Information assets such as customer information, technical information, intellectual property, and production equipment management systems may be subject to cyberattacks, ransomware infection, unauthorized access, internal fraud, or loss or theft of devices. Should such incidents occur, they could have a material impact on business continuity and the relationship of trust with customers. The Company is advancing the establishment of a multi-layered defense system, vulnerability diagnosis by external experts, enhanced employee training, and the development of an incident response system, but it states that it is difficult to avoid all risk given the increasing sophistication of attack methods.

The price of tungsten carbide, the Company's main raw material, is affected by trends in tungsten ore prices, which have recently shown sharp increases. The Company is enhancing its resilience to sudden fluctuations through close monitoring relationships with suppliers, strengthened bulk purchasing, and the use of recycled materials, but states that future trends could gradually affect operating results.

Due to the rapid expansion of AI-related demand, a shortage of PCB Drills (Carbide Drills for Printed Circuit Boards), particularly high-end products, has continued, and if the supply shortage becomes prolonged, customers may switch to competitors' products on a case-by-case basis, potentially leading to customer attrition and a resulting deterioration in business performance. The Company aims to strengthen relationships of trust with customers through unprecedented increases in production capacity and the introduction of proprietary high-quality products, but states that it is difficult to fully control this risk.