TSUBAKI NAKASHIMA CO., LTD.

As a result of recording an operating loss in the fiscal year under review, the Company breached financial covenants under syndicated loan agreements and other contracts. The Company has obtained waivers from the relevant financial institutions for all contracts not to demand acceleration of the loans, and refinancing discussions have begun for amounts due for repayment in the coming fiscal year; however, the risk remains that cash flow could be affected depending on external conditions. While the Company has determined that there is no material uncertainty, the fact of the covenant breach itself indicates a vulnerability in its financial position.

The Group may need to raise funds through additional borrowing or asset sales to repay principal and interest on interest-bearing debt, and this is subject to multiple factors including financial market conditions and the availability of buyers for asset sales. In a rising interest rate environment, the interest payment burden increases, which could adversely affect the Group's financial position and operating results. Given the current situation, in which the Group has breached financial covenants, the risk of higher costs for additional fundraising is particularly elevated.

The profitability of the Precision Components Business is affected by trends in global automotive and industrial machinery demand, while that of the Blower & Real Estate Business is affected by trends in capital expenditure demand; if demand deteriorates, the asset value of goodwill may decline, potentially requiring impairment. In particular, the Blower & Real Estate Business is highly dependent on capital expenditure demand and is structurally susceptible to economic fluctuations. Recording an impairment carries the risk of significantly worsening performance on a temporary basis.

Demand for the Company's products is linked to end demand in automobiles, electronic devices, consumer goods, machine tools, and other sectors, and is directly affected by declines in industrial production and deterioration in end markets. In particular, deterioration in the automotive industry has a relatively large impact on demand for the Company, and if global economic deterioration causes production declines across industries, this could have a material effect on performance through lower sales and utilization rates. The intensification of price competition due to the rise of Chinese and Indian players is also a factor pressuring earnings over the medium term.

The Group's products are sold at a relatively high proportion to a small number of large-scale manufacturers, and in the case of Precision Balls (Steel Balls) and Precision Rollers, bearing manufacturers account for a large share of sales. If transactions with major customers decline or are lost due to deteriorating relationships, changes in procurement policy, or consolidation and reorganization, this could have a significant impact on performance through lower sales and utilization rates. Because the diversification of the customer base is limited, sensitivity to the trends of specific customers is high.

The Group has manufacturing sites overseas and is exposed to a variety of risks, including changes in laws, regulations, and tax systems in each country, political, security, and economic fluctuations, logistics delays, infrastructure disruptions, protectionist trade measures, and foreign exchange fluctuations. If the recovery of invested capital does not proceed as planned, or if it becomes necessary to consolidate or withdraw from sites, additional costs or losses may arise. Difficulty in securing and training personnel and challenges in protecting intellectual property are also factors affecting the profitability of overseas operations.

Some materials and components are difficult to substitute due to their specialized nature, limiting the number of available suppliers; if supply delays, termination of transactions, or insufficient production capacity on the supplier side occur, this could affect performance through material shortages or increased procurement costs. If raw material prices rise, the Group seeks to absorb the impact through price pass-through to customers and cost reductions, but if the increase exceeds expectations, profit margins will deteriorate. The concentration risk among suppliers combined with the limits of pricing power creates a structure that puts compound pressure on earnings.

The Group has formulated a five-year medium-term management plan covering FY2025 (ending December 2025) through FY2029 (ending December 2029) under new management, but its execution will take place in an environment where intensifying price competition due to the rise of Chinese and Indian players, among other factors, is anticipated. Because the plan is based on assumptions that include external conditions beyond the Company's control, if the strategy does not proceed as planned or growth targets cannot be achieved, this could adversely affect performance. The current performance situation, having recorded an operating loss, is a factor increasing the difficulty of achieving the plan.

Ceramic Balls represent one of the Company's important growth strategies, but there is a risk that quality assurance, raw material procurement, securing supply capacity for base balls, and the customer adoption decision and certification process may not proceed as planned. If competing products expand or related intellectual property cannot be adequately protected, this could affect sales expansion and profitability, potentially having an adverse effect on future performance. As this business is central to the growth strategy, failure to achieve the plan could also affect market evaluation of medium- to long-term earnings prospects.

Conducting the Group's business requires securing highly specialized and skilled personnel both domestically and overseas, and if the necessary personnel cannot be secured and developed, this could affect productivity, quality, and business operations. If management and executive personnel were to leave en masse, the continuity of decision-making and organizational operations could be undermined, potentially affecting the business and performance. Given that this is a period during which the new management team is promoting the medium-term management plan, ensuring management stability is a particularly critical concern at this stage.