KEL CORPORATION

With rapid advances in the electronics industry and accelerating changes in market needs, there is a risk that development themes may diverge from market needs. The Company targets acquiring approximately 20% of orders from new products developed within the most recent three years, but if it becomes difficult to develop products with added value, this could lead to lost order opportunities and reduced profitability. As a countermeasure, the Company is working to secure and develop capable engineers.

Securing and developing capable engineers and other personnel is a critical risk that will determine future growth. The Company is addressing this through revisions to its human resources system in response to globalization, year-round recruitment activities, and the implementation of various education and training programs; however, personnel shortages are also directly linked to a decline in new product development capability.

While the Company's basic policy is to strengthen and expand overseas business, if customer development and sales network construction in the European and North American markets do not proceed as planned, growth opportunities may be lost. In addition, economic risks such as trade friction, labor issues, and social disruptions such as terrorism or infectious disease outbreaks may adversely affect overseas operations. The Company addresses this by collaborating with local legal and accounting firms and by collecting and analyzing local administrative information.

If unexpected product defects occur, resolving them requires significant time and effort and may adversely affect product supply, in addition to giving rise to compensation payments and loss of sales due to diminished customer trust. During the current fiscal year, quality defects occurred in certain products, resulting in the recognition of compensation costs. The Company is working to strengthen its quality control system and prevent recurrence through optimal operation of its quality management system, establishment of cross-departmental project structures, and the establishment of dedicated organizations.

If procurement shortages or delays occur due to sharp increases in demand for key raw materials such as crude oil and non-ferrous metals, production activities may be insufficiently conducted, adversely affecting business performance. In addition, if increases in raw material prices cannot be passed on to product prices, profits will decrease due to rising cost of sales. The Company addresses this through the formulation of appropriate procurement plans and diversification of procurement sources.

The electronics industry is highly susceptible to market conditions, and intensifying competition in specific market segments or core products may lead to price competition and deterioration of the order-taking environment. If a recurrence of past semiconductor or IT downturns, or an event with major impact on economic activity such as the COVID-19 pandemic, were to occur, orders would decline and adversely affect business performance. The Company is working to minimize the impact through improvements to its cost structure and other measures.

The Company exports products denominated in US dollars and euros, and yen appreciation beyond expectations could weaken product competitiveness and adversely affect business performance. The Company addresses this through risk hedging via foreign-currency-denominated purchases and forward exchange contracts, but exchange rate fluctuations, combined with rising manufacturing costs, affect profitability.

The environment is one in which manufacturing costs are rising due to soaring raw material prices, increased energy costs, and exchange rate fluctuations, and depending on the utilization of production facilities and business processes, declines in manufacturing efficiency and a high-cost structure may continue. If these cannot be sufficiently passed on to product prices, profitability will decline. The Company addresses this through reviews of manufacturing processes, promotion of cost reduction activities, and appropriate price pass-through.

Due to the reciprocal tariff policy introduced by the US government, high tariffs may be imposed on the Company's products; however, the current ratio of direct shipments to the US is low, and the direct impact is considered limited. Indirectly, there is a possibility of changes in delivery destinations resulting from customers relocating production sites, but at present no impact has been confirmed that would require postponing capital expenditure plans or business decisions. Given the uncertainty of future developments, the Company will closely monitor the situation and respond promptly as circumstances require.

The Company holds a large amount of personal and confidential information belonging to its business partners, and if information leakage or destruction, falsification of important data, or system failures occur due to cyberattacks, unauthorized access, computer virus intrusion, or similar causes, this could result in loss of trust and impact on business performance and financial condition. The Company addresses this by establishing a confidential information management structure through the enactment of its