HODEN SEIMITSU KAKO KENKYUSHO CO.,LTD.

In the fiscal year under review, the top four customer groups—Mitsubishi Heavy Industries Group (37.3%), LIXIL Group (13.1%), NGK Insulators Group (6.6%), and Kawasaki Heavy Industries Group (6.4%)—accounted for 63.4% of net sales. Significant fluctuations in these customers' order intake, production trends, or outsourcing policies could materially affect business performance. As a countermeasure, the Company is continuously working to expand its customer base and diversify the services it provides.

While the Company strives to maintain stable quality based on international quality management standards such as ISO9001, it cannot guarantee the elimination of defects in all products or that product liability claims will not arise in the future. The occurrence of large-scale product liability claims could affect business performance. In response, the Company maintains product liability insurance and addresses this risk through the definition of quality manuals centered on the Quality System Management Office and quality control departments, along with ongoing employee training.

Production sites are dispersed across three locations in Kanagawa Prefecture, three in Aichi Prefecture, one each in Okayama, Chiba, and Fukui Prefectures, and one in Thailand, but they are concentrated in the Kanto to Chubu region, meaning that a large-scale earthquake such as a Tokai earthquake could have a significant impact on production capacity. In addition to regular disaster prevention activities, equipment inspections, and fire insurance coverage, the Company has established a system whereby, in the event of an emergency, a response headquarters headed by the Representative Director and President is set up to work toward early resumption of operations.

The Company promotes productivity improvement and cost reduction through the development of processing technologies, processing jigs, and dedicated machinery, but if such development is hindered by the loss of capable personnel or a sharp rise in raw material costs, business performance could be affected. In response to rising raw material costs, the Company works to appropriately reflect such costs in sales prices and diversify procurement routes, while addressing personnel attrition through strengthened new graduate and mid-career hiring and the establishment of a "Job Return System."

The Company strives to secure low-interest, stable funding by taking into account interest rate trends, including future outlooks, but changes in financial market conditions, including significant fluctuations in interest rates, could affect future business results. In response, the Company utilizes interest rate swap contracts to prepare for fluctuation risk on both fixed-rate and floating-rate obligations.

Certain financial covenants are attached to the commitment line agreement as well as term loans and syndicated loans, and if these covenants are violated, there is a risk that the relevant borrowings would need to be repaid in full and the agreements terminated, which could affect cash flow. In response, the Company strives to secure stable business performance through improved profit margins.

Through the conduct of its business, the Company has access to a large amount of confidential information belonging to customers and others, and it also holds its own confidential information related to technology, sales, and other matters. If confidential information is lost or leaked externally due to computer virus infection, unauthorized access, or other causes, this could affect the business. The Company responds through the proactive implementation of information security activities, including education and training based on its "Information Security Regulations," and by gathering security-related information.

If the fair value of held assets declines significantly or the profitability of a business deteriorates, the application of impairment accounting could result in impairment losses, which could significantly affect business performance. In response, the Company has established and operates procedures ranging from identifying indications of impairment to recognizing and measuring losses for tangible and intangible fixed assets, and strives for early identification of such indications through recovery verification at the time of investment and subsequent monitoring.

The recognition of deferred tax assets is premised on estimates of future taxable income, and if profit plans are not achieved and estimates of future taxable income need to be revised, a decrease in deferred tax assets could affect business performance and financial condition. In response, the Company appropriately revises its profit plans in light of changes in the business environment and conducts careful, reasonable estimates of taxable income when assessing recoverability.