KAWADEN CORPORATION

Demand for the Company's products is heavily dependent on trends in domestic private non-residential construction investment, and a decline in investment due to deteriorating corporate earnings or other factors leads directly to a decrease in demand. The Company experienced a significant decline in demand in fiscal 2020 due to the impact of the COVID-19 pandemic, and a similar situation could recur in the future due to changes in the external environment. The Company is responding by strengthening its sales structure and other measures, but its structural dependence on market conditions remains high.

The power distribution and control equipment market is prone to price competition because it is difficult to differentiate products based on performance, and downward pressure on product prices intensifies during construction industry downturns. The Company responds through cost reductions, improved production efficiency, and shortened lead times, but there are limits to cost reduction, and it may not be able to respond adequately to price declines. If the Company is unable to maintain its competitiveness, this could adversely affect its business performance.

In FY2026 (ending March 2026), sales to Kinden Corporation accounted for 13.6% of sales composition, and Sekiko Shoji Co., Ltd. accounted for 9.9%, indicating a high degree of reliance on specific customers. No long-term supply agreements have been concluded with either company, and if transactions with these companies decrease or cease due to changes in their business policies or other factors, this could have a material adverse effect on the Company's business performance. The Company strives to maintain and expand good relationships with these companies, but there is no guarantee that transactions will continue.

In FY2026 (ending March 2026), purchases from Tachibana Eletech Co., Ltd. accounted for 23.2% of raw material purchases, and the Company depends on procurement of Mitsubishi Electric Corporation products as key components. If purchasing from Tachibana Eletech Co., Ltd. were to become difficult, the Company believes it could respond by changing suppliers, but there is a risk that it would be temporarily unable to obtain electrical equipment during the transition period, adversely affecting business performance. Similarly, if procurement of Mitsubishi Electric Corporation products were to become difficult, there is a risk that operations could be disrupted until the Company switches to other manufacturers' products.

Key raw materials such as steel sheets and copper bars are subject to market price fluctuations, but such fluctuations are not necessarily passed on to selling prices. If increases in raw material prices are not reflected in selling prices, this could adversely affect business performance through a decline in profit margins. The Company seeks to pass on price increases through differentiation efforts, but due to constraints from the competitive environment, it may not always be able to do so.

Customers frequently request specification changes during the period between order receipt and manufacturing, but due to customary practices in the domestic construction industry, increases in manufacturing costs resulting from specification changes are not necessarily reflected in selling prices. Price negotiations do not always succeed given the need to maintain competitiveness, and in some cases manufacturing costs may exceed selling prices. The Company responds through differentiation via thorough customer service and shortened lead times, but this remains a structural risk.

The period from order receipt to customer acceptance can extend to two to three years in some cases, during which there is a risk that customer order cancellations or bankruptcies could prevent product delivery or acceptance. Collection of accounts receivable after acceptance typically takes about two months, creating a risk of uncollectibility due to customer bankruptcy or other factors. The Company strives to thoroughly manage credit, but it is difficult to completely eliminate risks arising from the long cycle.

Because product delivery schedules are deeply embedded in construction schedules, delays or changes in construction schedules may cause product delivery and acceptance to be delayed from the originally planned timing. Since the Company recognizes revenue after customer acceptance, delays in acceptance directly lead to delays in revenue recognition, creating a risk of fluctuation in quarterly and annual business performance. In some cases, a batch of product deliveries is accepted all at once at the end of a series of deliveries, making it difficult to predict the timing of revenue recognition.

If a defect occurs in a product, it could lead to damage from power outages or serious accidents such as fire and its spread, potentially resulting in substantial compensation costs and a significant impact on corporate reputation. The Company carries product liability insurance, but there is no guarantee that the insurance will sufficiently cover the amount of compensation, nor that the Company will be able to continue to obtain insurance on acceptable terms. The Company manufactures products in accordance with ISO quality assurance standards, but cannot completely eliminate the risk of defects.

In FY2026 (ending March 2026), the Yamagata Plant accounted for approximately 70% of the Company's production, and the production capacity of the Kyushu Plant is considerably lower than that of the Yamagata Plant. If the Yamagata Plant were to suffer catastrophic damage due to a natural disaster such as an earthquake or an accident such as fire or explosion, this would seriously affect production, causing a significant decline in sales, and could require enormous costs to repair or replace the plant. The geographic concentration of production sites is a significant risk factor for business continuity.