NIPPON GEAR CO.,LTD.

The Company's business is heavily dependent on the domestic market. In the Gear and Gear Equipment Business and Construction Business, restraint of capital investment in the power sector, extension of periodic inspection work periods, and reductions in public investment budgets directly affect business performance. In the gear business, the proportion of specific customers related to automobiles and industrial machinery is high, and changes in the management policies or market trends of these customers may affect business performance. The Company faces a dual risk of domestic market dependence and customer concentration.

Due to the timing of budget execution for public works and private facility investment, construction completion and acceptance in the Gear and Gear Equipment Business and Construction Business tend to concentrate toward the fiscal year-end, resulting in revenue being weighted toward the second half, particularly the fourth quarter. If performance falters in the fourth quarter, the impact on full-year results is significant, increasing the uncertainty of performance forecasts.

If market prices for key raw materials such as ferrous products including castings and non-ferrous products such as copper alloys rise, suppliers may request price increases. The Company conducts price negotiations through competitive quotations from three or more suppliers, but in the event of a sharp rise in market prices, it may not be able to fully absorb the increase in raw material costs, and insufficient pass-through to selling prices could result in deteriorating profitability.

The Company's gear equipment is used in infrastructure facilities such as power plants and water/sewage systems, while its gears are used in automobiles and industrial machinery, meaning the social impact of a serious quality defect would be significant. Although the Company has established a quality control system to address this, unforeseen serious defects in products or maintenance could have a severe impact on business performance.

The Company manages core business information via cloud services, and network disconnection or system outages caused by natural disasters, accidents, or human factors could impede business activities. Although appropriate security measures are in place, system failures resulting from computer virus infection or hacking could affect business performance.

The Company owns manufacturing facilities for gears and gear equipment, and depending on land price trends and the profitability of the relevant fixed assets, impairment losses may occur. Given the structural nature of holding large-scale manufacturing facilities, deterioration in market conditions or declining profitability could trigger the application of impairment accounting, posing a risk to business performance and financial condition.

Since the Company's business is primarily based on made-to-order production, sudden changes in demand or specification changes carry the risk of generating surplus or obsolete inventory. The Company's policy is to write down inventory when net realizable value falls below acquisition cost or for obsolete inventory outside the normal operating cycle, and if substantial valuation losses occur, this could affect business performance.

The Company faces price competition in each business field, and further intensification of competition is anticipated depending on trends in product demand. Although the Company is working to improve profitability through new product development and enhanced customer satisfaction, continued intensification of price competition could affect business performance through declining profit margins.

The Company sells products in both developed and emerging markets, and business performance may be affected by changes in laws and tax systems, deterioration of economic or political conditions, or emergencies such as terrorism, riots, or epidemics in the countries where customers or end users are located. There is also exposure to foreign exchange fluctuation risk, and sharp currency movements could result in additional impacts on business performance.

The Company has established an internal code of ethics and compliance guidelines and strives to ensure thorough awareness among officers and employees, but in the event of a legal violation, there is a risk of loss of social credibility and economic sanctions. As a company handling products for infrastructure, compliance violations could have a serious impact on business relationships and business continuity.