KATO WORKS CO.,LTD.

Demand for construction machinery and related equipment depends on public investment, resource development, and real estate construction, making it susceptible to business cycle fluctuations. Trends in public investment across countries, energy prices, regional conflicts, and currency fluctuations may affect product demand. A sharp deterioration in global economic and market conditions would directly impact business performance. The Corporate Planning Department takes the lead in managing progress on the Medium-Term Management Plan 2025-2027 and accelerating the PDCA cycle to respond to this risk.

Escalating tensions in the Middle East, the prolonged Russia-Ukraine situation, US-China confrontation, changes in sanctions and tariff policies by various countries, and disruptions to maritime logistics may affect energy prices, raw material prices, transportation costs, and delivery times. In particular, constraints on the supply of crude oil and natural gas and disruptions to major shipping routes directly impact production, sales, and parts procurement plans. The Company addresses this risk through regular collection of information on political and economic conditions via overseas subsidiaries and country risk analysis.

Given the product structure with a high proportion of procured parts, rising raw material prices, energy prices, logistics costs, and labor costs, as well as supply shortages of specific components, electronic parts, and steel materials, or suppliers' production stoppages, quality issues, or transportation disruptions, may lead to increased costs or delays in production plans. In addition to strengthening communication with suppliers and maintaining optimal pricing, the Company thoroughly manages inventory and production plans for components with high procurement risk.

Environmental regulations concerning CO2 reduction, exhaust emissions, noise, and energy are applied to construction machinery products and manufacturing processes. Going forward, there may be increasing demands for the disclosure of greenhouse gas emissions and for decarbonization across the supply chain, as well as expanding carbon cost burdens. Increased costs to address these requirements may affect business performance and financial condition. Under the Medium-Term Management Plan 2025-2027, the Company has established the practice of sustainability management as a basic policy and is taking necessary measures, including investment in research and development.

The Company holds confidential information, including customer information, personal information, and design information. If information leakage, data corruption, or business disruption occurs due to ransomware, unauthorized access, intrusion via the supply chain, incidents at outsourcing partners, or system failures, resulting damages, recovery costs, and loss of credibility may affect business performance and financial condition. As cybersecurity and personal information protection regulations are strengthened in various countries, there is also a risk of increased compliance costs. The Company strengthens its management system through timely application of security patches, defense against and early detection of unauthorized intrusions, and the establishment of incident recovery procedures.

In addition to domestic and international machinery safety and emissions regulations, if export controls, import restrictions, tariff impositions, prohibitions on transactions with sanctioned parties, or localization requirements are strengthened due to enhanced economic security policies, sales, procurement, logistics, and investment activities may be affected. Furthermore, if violations of laws such as those concerning bribery prevention, competition law, human rights and labor, or personal information protection occur, the Company may face sanctions such as administrative penalties, litigation, or suspension of transactions imposed by regulatory authorities, leading to a loss of social credibility. The Company strengthens its governance framework through the development of compliance regulations, regular education and training, an internal reporting system, and the establishment of an internal control committee.

As the Company engages in overseas sales and procures materials from overseas, fluctuations in exchange rates in import and export transactions may affect business performance. The Company minimizes exchange rate fluctuation risk by shifting to yen-denominated export transactions and utilizing forward exchange contracts for foreign currency-denominated receivables.

The Company procures funds through bank borrowings, syndicated loans, and commitment line agreements. If domestic monetary policy or financial market fluctuations lead to rising procurement interest rates, deteriorating refinancing conditions, or changes in financial institutions' lending stance, fund procurement costs and cash flow may be affected. Some borrowings are subject to financial covenants, and if the Company breaches specific covenants and is required to repay such borrowings, this would have a material impact on business performance and financial condition. The Company works to maintain good relationships with financial institutions, diversify funding methods, and optimize working capital while improving capital efficiency.

Manufacturing construction machinery requires substantial capital investment in extensive factory sites and production facilities. If profitability falls below the assumptions in the business plan due to deteriorating business conditions or other factors, the recognition of new impairment losses may affect business performance and financial condition. The Corporate Planning Department strengthens investment management and continues monitoring appropriate capital investment decisions and investment efficiency to reduce this risk.

There is a risk of substantial costs arising from large-scale recalls or market countermeasures, as well as significant liability costs in the event of product accidents involving large machinery, which could also have a material impact on the credibility of the Group. If damages exceed insurance coverage, this would directly affect financial condition. The Company addresses this risk through the establishment and maintenance of a quality management system, the collection of market quality information and improvement activities, and adequate insurance coverage, including product liability insurance.