KOKUSAI CO., LTD.

The Group conducts business mainly in the United States, South Korea, China, and Southeast Asia, and tariff changes under the new U.S. administration and disruptions to raw material prices and the crude oil supply chain due to the U.S.-Iran conflict may affect product manufacturing. In addition, overseas markets carry inherent risks such as changes in laws and tax systems, changes in political and economic conditions, terrorism, and the prolongation of the situation in the Middle East. The Group positions ASEAN countries and other emerging markets as the focus of its future regional strategy, and the materialization of these risks may spread across the entire business.

At the end of the consolidated fiscal year, tire-related testing machines accounted for an extremely high 68.7% of the order backlog, and their share of consolidated net sales remained at a high level, at 60.0% in FY2025 (ended March 2025) and 58.2% in FY2026 (ending March 2026). If capital expenditure trends in the tire and automotive industries stagnate, this could have a direct and significant impact on the Group's operating results. Diversification to spread the risk of concentration on specific products and industries remains a challenge.

Overseas sales as a percentage of consolidated net sales remained at high levels, at 70.7% in FY2025 (ended March 2025) and 71.0% in FY2026 (ending March 2026), and this high level is expected to continue going forward. A deterioration in economic conditions and market trends in Asia, including China, the Group's major overseas sales market, would directly affect operating results. The degree of overseas dependence could increase further due to the relocation of overseas production in the automotive and tire industries and the reorganization of global supply chains.

Sales denominated in U.S. dollars have been increasing, from US$18,457 thousand in FY2025 (ended March 2025) to US$26,944 thousand in FY2026 (ending March 2026), making the Group susceptible to exchange rate fluctuations. Foreign exchange gains and losses fluctuated, with a gain of ¥25 million in FY2025 (ended March 2025) and a gain of ¥155 million in FY2026 (ending March 2026), and a yen appreciation phase could adversely affect business performance. Although the Group has taken measures against exchange rate risk, it states that it is difficult to completely eliminate the impact.

The Group is subject to various legal regulations not only in Japan but also in the United States, South Korea, China, and Southeast Asian countries, and business could be affected if regulations are amended or if the Group fails to comply with them. Regulatory environments differ by country, and in emerging market countries in particular, legal systems can change rapidly. Although the Group strives to comply with legal regulations, the compliance risk associated with multinational operations is an issue that requires ongoing management.

Although products are manufactured in accordance with quality control standards, if a claim arises due to a defect or quality deficiency, this could lead to a decline in customer trust and affect the business. The Group has product liability insurance, but there is no guarantee that the insurance would sufficiently cover damages in the event of a large damages claim. Given that the Group's core business is testing machines for the tire industry, where customer demands for product safety and quality are high, quality issues represent a risk that goes to the core of the business.

The Group seeks to protect its proprietary technology through the acquisition of patents and other rights, and works on risk management with the cooperation of patent attorneys, but there is a risk that it cannot accurately determine whether its current and future products infringe on the intellectual property rights of third parties. If a patent right of which the Group is unaware is established, the Group could be sued for damages by a third party. If an intellectual property dispute arises, litigation costs and business restrictions could occur, potentially affecting operating results.

The Group has production sites in Japan and overseas, and unforeseen events such as production stoppages, damage to facilities, and power supply shortages caused by natural disasters such as major earthquakes and typhoons, or by accidents or fires, could disrupt business activities. Japan in particular carries a high earthquake risk, and the impact could be severe if a major production site were affected by a disaster. There is no specific description in the securities report regarding the status of business continuity plan (BCP) development.

Management plays an important role in each area of responsibility, and business performance could be affected if an officer becomes unable to perform his or her duties or if the Group fails to develop or secure successor talent. Where dependence on specific management personnel is high, there is a risk that sudden loss of such personnel could disrupt the continuity of management. Details of specific measures for successor development and talent acquisition by the Group are not disclosed in the securities report.