TOKYO KEIKI INC.

Geopolitical risks such as the Russia-Ukraine conflict and the review of U.S. tariff policy carry the inherent risk of triggering a chain reaction of deteriorating shipping market conditions and sluggish demand for industrial machinery and construction machinery. In the Marine & Port Equipment Business, cancellation of newbuilding vessel construction plans, and in the Hydraulic & Pneumatic Equipment Business, changes to customers' production plans, may affect business plans. There is also a risk that sharp exchange rate fluctuations could reduce profitability, necessitating impairment of related assets.

In the Defense & Communication Equipment Business and the Fluid Equipment Business, transactions with government agencies such as the Ministry of Defense, Japan Self-Defense Forces, and the Ministry of Land, Infrastructure, Transport and Tourism are numerous, and changes in budget allocation or postponement/cancellation of bidding for large-scale projects directly affect business plans. With the defense budget for the five years through FY2027 set at ¥43 trillion, the order backlog has reached an all-time high level, and the impact of any change in budget policy has reached a level that cannot be ignored. The Group responds through detailed information gathering on government trends and financial information monitoring at management meetings.

Competition for new graduate recruitment is intensifying due to the declining birthrate, aging population, and increasing fluidity in the labor market, and competition to differentiate treatment in terms of salary and benefits is also intensifying. In particular, if human resources become insufficient in the defense business, where the order backlog is rapidly expanding, there is a risk of penalties arising from delivery delays. The Group has established a follow-up system to maintain a balance between new graduate and career hires and to reduce the early turnover rate.

There is an inherent risk that large-scale cyberattacks or zero-day attacks by unknown computer viruses could result in the destruction, falsification, or external leakage of important data, or serious system downtime. For the Group, which holds confidential business information and important sales information, information leakage would directly damage not only business and financial results but also the company's credibility. In response, the Group has established a group-wide Information Security Management Committee, strengthened management by specialized departments, and conducts quarterly progress reviews at management meetings.

The Group relies on external suppliers for many materials, electronic components, and modules, and there is a risk that unexpected price increases, discontinuation of production, supply-demand tightness, or supply stoppages due to disasters affecting suppliers could result in increased costs or delivery delays. In particular, maintenance parts for products sold to the Ministry of Defense have a unique business characteristic in that discontinuation of production leads to

Due to the rapid increase in the defense budget, the order backlog for products sold to the Ministry of Defense has reached a high level, resulting in a significant increase in inventory assets, which has temporarily increased borrowings for working capital. If bulk purchases of maintenance parts occur, borrowings will increase further, creating an inherent risk of vulnerability to a significant rise in interest rates. The Group responds by optimizing the timing of parts purchases and proposing design changes for aging equipment, while also conducting financial information monitoring at management meetings.

It is not possible to completely eliminate the occurrence of defects in all products, creating an inherent risk of recalls, on-site replacement or repair work, and damage claims for compensation from customers. There is no guarantee that product liability insurance will cover the full amount of any final compensation, and large-scale repairs or compensation could lead to loss of credibility and substantial costs. In response, the Group has strengthened design reviews by internal experts at the design stage, established a Quality Control Office, and appointed an executive officer responsible for quality control to establish a quality management system.

If the Group's forecasts are not appropriate in response to the emergence of innovative new technologies, rapid changes in customer and market demands, the introduction or lifting of new legal regulations, or new entrants from other companies, there is a risk that delays in technology development or commercialization could result in lost opportunities and a decline in market share. The materialization of this risk could adversely affect the improvement of profitability and the expansion of business domains. The Development Committee, chaired by the executive officer in charge of technology, promotes group-wide information sharing and the formulation and implementation of technology strategy.

The head office, located in Ota Ward, Tokyo, carries an inherent risk of direct impact from a major earthquake directly beneath the capital, and Tochigi Prefecture, a major production site, also faces the possibility of social infrastructure disruption from wide-area disasters such as super typhoons and linear rainbands. In addition, if a mass infection of employees occurs due to an unknown infectious disease such as a new strain of influenza, there is a risk of significant impact on business continuity. In addition to developing crisis management manuals, conducting regular drills, and building a safety confirmation system, the Group ensures resiliency by utilizing the seismically isolated Heiwajima Business Office and advanced data centers.

There is a risk that energy prices will continue to rise or remain high due to structural factors such as geopolitical risks and the decline in upstream resource development associated with the transition to a decarbonized society. For the Group, which operates numerous machine tools in the Hydraulic & Pneumatic Equipment Business and 24-hour clean rooms in the Defense & Communication Equipment Business, an increase in the burden of electricity costs and additional costs from introducing private power generation equipment could adversely affect business performance. The Group is promoting consideration of investment plans for energy-saving production equipment, the introduction of solar power generation systems, and the switch to electricity derived from renewable energy.