KYB Corporation

Major products of the AC Business and HC Business are components for automotive and construction machinery manufacturers, and business performance is significantly affected by global production volume trends. If geopolitical risks (Russia's invasion of Ukraine, the situation in the Middle East) or trade risks stemming from US tariff measures materialize, there is a possibility of production and sales activities being suspended and a material impact on profitability. The Group conducts global information gathering and analysis to respond according to the situation.

The overseas sales ratio is high at 61.8%, and the Group is significantly affected by foreign exchange fluctuations, including the business results of overseas affiliated companies. While the Group seeks to mitigate risk through the allocation of global production bases and forward exchange contracts, fluctuations exceeding expectations may affect the financial position and business results. The Group also holds interest-bearing debt, and although it has responded through fixed-rate financing, future interest rate increases may also affect business results.

Violations of laws and regulations or breaches of contracts with customers due to falsification of quality records may affect the financial position through damages claims and corrective action costs. The Group supplies important components such as shock absorbers and power steering for automobiles and control valves for construction machinery, and the impact of any quality defects would be significant. The Group seeks to reduce quality fraud risk by having the Quality Control Department conduct audits at all sites and by strengthening self-audits at each site.

Cyberattack risk is increasing due to the growing complexity of information system environments and the spread of telework, and if information leaks or system failures occur, they may affect business results and financial position. The Group is strengthening its defense capabilities across the entire Group through common security education and training, strengthening supply chain security, developing incident response manuals, and establishing common security level guidelines.

Damage to the Company's own production facilities or disruption of the supply chain due to earthquakes, fires, or wind and flood damage may result in operational suspension. The Group conducts BCP training focused mainly on domestic earthquakes, which are presumed to have a high probability of occurrence, and has implemented measures for the early restoration of production capacity. Cyber BCP incident response training is also conducted in parallel.

If suppliers cease operations or withdraw from business due to a lack of successors, aging facilities, or other factors, resulting in an unexpected halt in the supply of components, production activities may stagnate, affecting business continuity. The Group closely monitors the situation of suppliers of concern and deepens communication with them, and seeks to reduce risk through alternative measures such as changing suppliers when supply continuity becomes difficult.

Raw materials and component parts procured by the Group are significantly affected by international commodity market conditions and foreign exchange rates, and if price increases cannot be sufficiently reflected in sales prices, business results may be significantly affected. The Group is working to reduce costs through multiple sourcing and consolidation of purchasing functions, but as labor costs also continue to rise, it is implementing appropriate price revisions.

It was discovered that products not conforming to the Minister's certification standards had been installed in buildings due to falsification of performance inspection record data for building seismic isolation/damping oil dampers, and the Company has recorded a provision for product warranties related to replacement work costs, business compensation, and other expenses. All 67 recurrence prevention measures had been completed as of the end of March 2022, and related litigation has also concluded in part without additional costs; the Company currently judges that the possibility of an outflow of economic benefits has decreased.

Many of the factories that produce hydraulic products are equipped with painting facilities using organic solvents and tanks for hydraulic fluid and chemicals, and production activities may be temporarily suspended due to fire or the leakage of hazardous substances. The Group seeks to reduce the risk of operational suspension through inspections using a fire prevention system checklist, fire prevention follow-up patrols, and confirmation of fire risks related to equipment and purchased items.

Regarding the Aircraft Equipment Business, from which withdrawal was announced in 2022, coordination with customers and others is proceeding, but if unforeseen costs or losses arise in the process, they may affect business results and financial position. Although the Company strives for appropriate management, uncertainties remain in the withdrawal process.