THE KINKI SHARYO CO., LTD.

As the Company is essentially a specialist manufacturer with the Railway Vehicle-Related Business accounting for the vast majority of consolidated net sales, its performance is highly dependent on demand trends for new vehicles. If order competition intensifies due to a deterioration in economic conditions, or if the Company is forced to accept orders under harsh conditions, this could have a material impact on its business performance. The Company addresses this by discussing and deciding on price, specifications, and profitability at meetings attended by all full-time internal officers prior to accepting orders.

Many projects are custom-made orders that span several years from order receipt to delivery, and if significant economic fluctuations or changes in economic conditions occur after contract conclusion, there is a risk of soaring raw material prices, delayed delivery of procured parts, and unexpected additional costs arising from design or process changes. This creates a structural vulnerability where unforeseen cost increases directly squeeze profitability. Even after production begins, the Company manages processes and profitability through the same meetings, aiming to share problems early and implement countermeasures.

As society advances, customer demands for improved vehicle quality are increasing, while intensifying competition among manufacturers is also requiring further price reductions. If it becomes difficult to achieve both quality improvement and cost reduction simultaneously, there is a risk of impact on order acquisition and profitability. The Company addresses this by leveraging its strengths, such as excellent design capabilities and high-quality welding technology, and focusing on winning nominations for competitive bids and negotiated contracts.

Overseas projects require compliance with European-led global standard technologies and specifications, and as the industry becomes increasingly oligopolistic and globalized, the Company faces intense competition from major global manufacturers. In U.S. projects, the Buy American provisions mandate that 70% or more of procurement be sourced domestically within the U.S., while many key components must nonetheless be procured from European manufacturers, creating constraints. These regulatory and competitive environments pose a barrier to order acquisition and carry a risk of impacting business performance.

In the manufacture of railway vehicles that support public transportation, there is a risk that accidents or defects that could not be anticipated by the Company alone may occur, or that quality-related complaints or recalls could result in substantial costs such as damages and litigation expenses. Since railway vehicles are part of a broader railway system, the possibility of defects arising from interaction with other systems cannot be ruled out. The Company addresses this through the establishment of a quality management system via ISO9001 certification and company-wide efforts toward developing new technologies.

The manufacture of railway vehicles, characterized by high-mix, low-volume production, relies on nearly manual assembly by numerous skilled employees, and passing on technical skills requires long-term education and training. Due to the declining birthrate, aging population, and the ongoing retirement of the baby-boomer generation, securing excellent young talent is becoming increasingly difficult year by year, creating a risk that personnel shortages will directly affect production capacity and quality. The Company addresses this by establishing training centers to improve the skills of younger employees, preventing talent attrition through the development of a comfortable working environment, and strengthening recruitment activities.

Trends in financial markets and rising procurement interest rates carry a risk of affecting the business performance and financial condition of the Company group. An increase in fund procurement costs may squeeze profitability given the business structure, which involves many long-term, large-scale projects. The Company diversifies this risk by securing stable funding from its main and sub-main banks, as well as procuring funds broadly from other financial institutions.

The proportion of foreign-currency-denominated transactions can approach nearly half of the total, and depending on exchange rate movements, there is a risk of a material impact on the business performance of the Company group. In particular, when the proportion of overseas projects is high, fluctuations in either the yen's appreciation or depreciation can affect profitability. The Company addresses this by utilizing hedging measures such as forward exchange contracts as appropriate, while monitoring exchange rate trends.

In the event of a large-scale disaster such as an earthquake or typhoon, or an outbreak of infectious disease, there is a risk of direct or indirect impact on the business performance of the Company group. With respect to infectious diseases, there is a concern that infections among employees or delays in parts procurement could disrupt production processes. The Company addresses this through the formulation of a business continuity plan (BCP), seismic reinforcement work, regular inspections, emergency drills, insurance coverage, the introduction of a safety confirmation system, stockpiling of water and food, and efforts to prevent the spread of infection.