KITZ CORPORATION

The Group's major domestic manufacturing sites are concentrated in the northwestern part of Yamanashi Prefecture and the central-southern part of Nagano Prefecture. A large-scale natural disaster—including the Nankai Trough megaquake, which is estimated to have an approximately 90% probability of occurring within the next 40 years—as well as war/terrorism or the spread of infectious disease, could result in prolonged production stoppages and supply chain disruptions. As countermeasures, the Group has developed a business continuity plan (BCP), strengthened earthquake insurance coverage, enhanced global supply chain risk countermeasures, and introduced new working styles through DX promotion.

If a cyberattack or insider misconduct causes an information system outage or the corruption or leakage of important management information, operational efficiency and social credibility could deteriorate significantly, and system recovery could require substantial time and expense. As countermeasures, the Group has established information security and personal data protection policies, conducts critical security assessments, controls OA/FA networks, is migrating to data centers (cloud), provides e-learning-based information management training, and continuously conducts practical cyberattack response drills.

If a defect or nonconformity in product design, procurement, or manufacturing processes is discovered during customer use, the Group could incur recall costs and be subject to damages claims, significantly undermining customer trust. As countermeasures, the Group identifies and continuously improves issues in its development and manufacturing processes based on actual past claim cases, and continuously reviews insurance coverage to ensure it remains appropriate.

If falsification or false statements are discovered in documents submitted to government authorities, inspection data, or various records, the resulting decline in social credibility and brand image could affect business performance and financial condition, and could significantly affect investors' investment decisions. As countermeasures, the Group continuously reviews its experimental and inspection data and document creation processes, as well as the management methods for various internal rules.

Valves, the Group's main products, are sold widely for use in building equipment, machinery, and plants, and are therefore affected by domestic and overseas construction trends and manufacturing capital expenditure trends. Products for semiconductor manufacturing equipment carry the risk of significant short-term fluctuations in the semiconductor market, while the Copper Products Business is heavily influenced by domestic housing-related investment trends and copper market prices. As a result, economic fluctuations can destabilize sales and profits. In the domestic building equipment market, a shrinking trend has become apparent due to population decline, rising construction costs, and labor shortages.

In the Valve Business, changes in technology and customer needs are driving a shift toward non-metallic valves, which could shrink the metal valve market; in overseas markets, price competition has intensified in recent years due to the improved competitiveness of Asian manufacturers. In the Copper Products Business, unforeseen alternative products could significantly reduce demand for Brass Rods. If competitors possess superior technological capabilities or financial strength, the Group may be unable to maintain a competitive advantage in its business going forward.

The Group conducts production and sales activities in Japan, Asia, Europe, and South America, and since the transaction currencies used at production sites and sales sites differ, it is constantly exposed to the effects of exchange rate fluctuations. While the value of domestic production exports and overseas subsidiaries' exports to Japan are broadly balanced, a decline in local currencies related to overseas business investments could reduce equity capital through the foreign currency translation adjustment account. For certain foreign-currency-denominated transactions, the Group hedges risk through forward exchange contracts.

Prices of major raw materials such as copper, stainless steel, aluminum, iron, and zinc can fluctuate sharply depending on market conditions, and fluctuations in the copper market in particular could have a significant impact on business performance. There is no guarantee that the Valve Business and Copper Products Business can pass on the entirety of raw material price increases to sales prices, and there is also a risk of supply disruption due to dependence on specific suppliers. As countermeasures, the Group maintains a policy of procuring from multiple suppliers, conducts hedging transactions for copper in the Copper Products Business, and performs due diligence based on supplier guidelines.

The Valve Business's overseas production ratio is approximately 45% (with major sites in Thailand, Taiwan, and China), and its overseas sales ratio is approximately 42% (with major sales regions in Asia and the Americas). Business activities could be significantly affected by economic, political, and legal/tax system changes, natural disasters, infectious diseases, and security/trade conditions in these regions. In addition, if tax authorities determine that transfer prices related to transfer pricing taxation are inappropriate, the Group could be subject to double taxation or additional tax assessments.

If the Group is unable to comply with environmental regulations such as the RoHS Directive and the REACH Regulation, it could become unable to supply products to the market, significantly affecting business performance and financial condition. In addition, the tightening of laws and regulations related to global warming countermeasures poses a risk of new tax burdens or costs associated with equipment changes. As countermeasures, the Group operates a PDCA cycle through its Environment, Safety and Health Committee, introduces energy-saving equipment such as solar panels, adopts CO2-free electricity, and is promoting enhanced information disclosure through its December 2021 declaration of support for the TCFD recommendations.