SAKAI HEAVY INDUSTRIES,LTD.

The overseas sales ratio stood at 54.6% in FY2026 (ending March 2026), accounting for more than half of net sales, and business performance is significantly affected by economic conditions in the principal markets of North America and Asia. Should unexpected demand fluctuations occur, they could adversely affect the Group's operating results and financial condition. The Group's policy is to gather information from government agencies and industry associations and take flexible countermeasures as needed.

As the Group maintains production sites in North America, Indonesia, and China and sells worldwide, a stronger yen adversely affects performance while a weaker yen has a positive effect. Depreciation of the currencies of production regions could raise procurement costs and reduce price competitiveness. Although the Group implements hedges such as forward exchange contracts, medium-term currency fluctuations may prevent business activities from being carried out as planned with certainty. Foreign exchange gains for the consolidated fiscal year under review amounted to ¥2,380 thousand.

As a specialized manufacturer of road construction machinery, continuous introduction of new products is essential, and R&D expenses reached ¥955,520 thousand in FY2026 (ending March 2026). There is a risk that R&D outcomes are uncertain and do not necessarily translate into business results. The Group is advancing development of advanced technologies such as autonomous rollers and emergency braking systems, but failure to achieve results could hinder corporate growth.

Corporate growth depends heavily on capable personnel engaged in research and development, making the recruitment and development of highly skilled technical talent, as well as appropriate evaluation of research outcomes, an important management challenge. Failure to secure or develop such talent could adversely affect corporate growth, operating results, and financial condition. The annual securities report does not disclose specific countermeasures in detail.

The Group is subject to legal regulations in each country where it operates, including business and investment licensing and tariff/import-export restrictions, and faces the risk of unexpected changes in laws and regulations or unfavorable changes in tax systems. In addition, unfavorable political factors or social disruption caused by war, among other events, could affect the Group's activities. The Group's policy is to take countermeasures based on information gathered from government agencies and other bodies.

In response to the tightening of emission regulations in various countries, the Group continues to promote the application of new engines across all models. Delays or insufficient responses to regulatory requirements could hinder the continued sale of products and adversely affect operating results. This response effort, carried over from the previous consolidated fiscal year, is ongoing, and an increase in compliance costs is also anticipated.

In the manufacture of road rollers and other compaction equipment, the possibility of future product defects cannot be entirely ruled out. Should a serious defect occur, it could necessitate a large-scale recall or substantial compensation payments, as well as significantly affect the Group's corporate reputation. Although the Group carries product liability insurance, there is no guarantee that it would sufficiently cover the final amount of damages. The Group addresses this through thorough quality control, including maintenance of ISO 9001 certification.

The Group holds shares in financial institutions and business partners, exposing it to stock market price fluctuation risk. As no special hedging measures are employed, a decline in share prices could result in valuation losses on held shares, adversely affecting financial condition. Fair value information related to securities is disclosed in the notes concerning securities.

The Group conducts indirect sales through trading companies and agents as well as direct sales to end users. Should a customer fall into financial difficulty, the resulting inability to collect trade receivables could adversely affect the Group's financial condition. Although no material bad debt occurred during the consolidated fiscal year under review, the high proportion of overseas sales makes credit management particularly important.

Should the spread of an infectious disease such as COVID-19 lead to city lockdowns or movement restrictions, or should officers or employees become infected, business operations could be disrupted through demand declines or production line closures. For the Group, which maintains production and sales sites both domestically and overseas, the spread of infectious disease is recognized as a risk that could affect operating results and financial condition.