NIPPON SHARYO,LTD.

For important contracts with large order amounts, internal review of processes, costs, and contractual risks is conducted prior to order acceptance; however, if raw material price surges or design changes occur after order acceptance, cost increases exceeding the initial internal assessment may occur, potentially deteriorating business profitability. Given the characteristics of the build-to-order business model, it is difficult to completely eliminate price fluctuation risk in long-term contracts, raising concerns about the impact on business performance and financial condition. The Company addresses this by establishing an order review framework through the Board of Directors and other bodies.

The Group is subject to various laws and regulations in Japan and overseas, and if it responds inadequately to regulatory changes, it may incur losses such as fines or surcharges, lose order opportunities due to administrative sanctions, or suffer a decline in social reputation. Compliance is maintained through the establishment of a Compliance Committee and the company-wide dissemination of the "Nippon Sharyo Group Code of Ethics" and "Our Code of Conduct"; however, the complexity of regulatory compliance across multiple countries and regions remains a residual risk.

Since many build-to-order projects require a long period from order receipt to delivery, sharp price fluctuations in raw materials and parts or significant delivery delays caused by changes in the supply-demand environment during that period may make it difficult to pass on costs to sales prices, potentially affecting production processes as well. While the Company addresses this through timely procurement and yield improvement, there is a structural challenge in that, given the nature of long-term contracts, it is difficult to pass on the full amount of cost increases.

Since FY2024, the Company has established a company-wide quality policy and has worked to instill a "quality first" mindset and improve design and manufacturing quality; however, if a serious product defect arising from unforeseeable causes occurs, it may affect business performance and financial condition through recall response costs, damages, and loss of customer trust. As the Company handles social infrastructure products such as rolling stock and bridges, the social impact in the event of a defect is particularly significant.

For some parts, the number of vendors capable of supply is limited, and if an unexpected vendor closure or production suspension occurs, alternative procurement may become difficult, potentially having a serious impact on the production process. Although the Company strives to expand its vendor base, given the nature of specialized and dedicated parts, securing alternative suppliers in a short period is not easy. The risk of supply chain concentration may affect business performance and financial condition.

If the Group's manufacturing plants or vendor facilities are damaged due to the intensification of natural disasters caused by climate change, business activities such as production and sales may be suspended or delayed, potentially affecting business performance and financial condition. The Company has formulated business continuity plans for disasters and is promoting the development of products and services that contribute to carbon neutrality; however, the increasing scale and frequency of natural disasters heightens uncertainty.

The Group is subject to environmental laws and regulations concerning hazardous substances, waste disposal, chemical substances contained in products, and soil contamination, and if future regulatory tightening results in additional response costs or hinders product development, production, or sales activities, it may affect business performance and financial condition. The Company is progressively promoting waste reduction through recycling and the renewal of production facilities to improve energy efficiency; however, the direction and timing of regulatory changes are difficult to predict.

Litigation risk related to business operations exists continuously across the Company's various business activities, and if significant litigation is brought, it may affect business performance and financial condition through damages or settlement costs. As the Company handles large-scale infrastructure products such as rolling stock, bridges, and construction machinery, the litigation risk related to product defects or contractual disputes is potentially significant. The annual securities report does not disclose specific details of countermeasures.

The Company holds confidential information related to technology and sales, as well as confidential information of business partners, and if such information is lost or leaked due to an unforeseen event, it may affect business performance and financial condition through a decline in social reputation and damage to trust relationships with business partners. The Company addresses this through the development of internal regulations, strengthening of security systems, and implementation of information security education; however, risk continues to exist as cyberattacks become more sophisticated.

If an unforeseen accident occurs at a manufacturing plant, or if a large-scale earthquake, typhoon, or other natural disaster or a large-scale epidemic occurs, production activities may be suspended or delayed, potentially having a significant impact on business performance and financial condition. Regarding industrial accidents, a reporting and countermeasure check system to the Board of Directors and other bodies has been established, and business continuity plans anticipating earthquakes, typhoons, and other events have been formulated; however, there are limits to the ability to respond to unforeseen large-scale events.