Rigaku Holdings (268A) FY2026 Q2 Earnings Report

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Executive Summary

Q2 of FY2026 resulted in both lower revenue and lower profit, rather than higher revenue and lower profit, with deteriorating profitability representing the key focus. Revenue was ¥395.6B (-2.9% YoY), Operating Income was ¥25.8B (-54.9%), and Net Income was ¥16.3B (-56.9%). The gross margin declined by approximately 1pt from the prior year to 54.8%, while the SG&A expense ratio rose by approximately 6.5pt to 47.9%, causing the Operating Income margin to contract sharply from 14.0% to 6.5%. Increased finance costs also pressured Profit Before Tax, confirming a structural decline in profitability.

Factors Affecting Business Performance

【Revenue】Revenue was ¥395.6B, representing a modest 2.9% YoY decline. Although the primary reason for the year-on-year decline cannot be conclusively determined from the disclosed information, the decrease in trade receivables and lengthening DSO suggest a change in the pace of project acceptance and revenue recognition.

【Profit and Loss】Operating Income was ¥25.8B (-54.9% YoY), and the Operating Income margin declined significantly to 6.5% from 14.0% in the prior year. While the gross margin deteriorated slightly to 54.8% from 55.8%, the SG&A expense ratio increased substantially to 47.9% from 41.4%, becoming the primary factor behind the deterioration in the Operating Income margin. Below operating income, finance costs of ¥6.9B pressured Profit Before Tax, which amounted to ¥20.4B (-62.6% YoY), while Net Income remained at ¥16.3B (-56.9%). In conclusion, both revenue and profit declined.

Key Financial Indicators

【Profitability】The Operating Income margin of 6.5% and Net Income margin of 4.1% both declined significantly from the prior year’s levels of 14.0% and 9.3%, respectively. The gross margin was 54.8%, only slightly lower than the prior year’s 55.8%, indicating that the increase in SG&A expenses, rather than the cost structure, was the primary factor behind the deterioration in margins.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥29.2B, approximately 1.8 times Net Income of ¥16.3B, indicating relatively solid cash-generation capacity; however, OCF decreased significantly by 57.7% YoY. The increase in inventories (-¥46.3B) and decrease in trade payables (-¥30.2B) pressured working capital, resulting in slightly negative Free Cash Flow of -¥1.3B.【Investment Efficiency】ROE was 1.8%, reflecting the decline in the Net Income margin and the low total asset turnover ratio, with total assets of ¥1876.5B against revenue of ¥395.6B. Goodwill of ¥518.8B represents 27.6% of total assets and 58.2% of net assets, structurally reducing asset efficiency.【Financial Soundness】The Equity Ratio was 47.5%, remaining broadly unchanged from 47.7% in the prior year. Interest-bearing debt, including long-term borrowings of ¥495.1B, is trending upward, making the development of interest-payment burdens, together with the increase in finance costs, a key monitoring point.

Cash Flow Analysis

OCF was ¥29.2B, down 57.7% YoY. Although it remained above Net Income of ¥16.3B, the magnitude of the decline was substantial. From a working capital perspective, inventories increased by ¥46.3B and trade payables decreased by ¥30.2B, putting pressure on cash, while contract liabilities increased by ¥14.1B, partially offsetting the impact. Investing Cash Flow was -¥30.5B, of which capital expenditures accounted for ¥27.1B, indicating that investment in existing businesses is continuing. Financing Cash Flow was positive at ¥24.9B, apparently driven primarily by an increase in short-term borrowings, with financing exceeding dividend payments of ¥21.2B. As a result, Free Cash Flow, the sum of OCF and Investing Cash Flow, was -¥1.3B, indicating a structure in which dividends and capital expenditures could not be funded solely through operating activities and the Company depended on external financing. Cash and cash equivalents remained substantial at ¥272.5B, securing short-term financial flexibility.

Earnings Quality

Current-period earnings were primarily generated by recurring business activities, while the scale of non-recurring items was limited, with other income of ¥0.5B and other expenses of ¥1.9B. However, finance costs of ¥6.9B were equivalent to approximately 27% of Operating Income of ¥25.8B, materially pressuring Profit Before Tax and representing the primary reason for the divergence between Net Income and Operating Income. OCF of ¥29.2B exceeded Net Income of ¥16.3B, indicating that earnings conversion into cash was favorable from an accrual perspective. Nevertheless, OCF was also affected by changes in working capital, including the increase in inventories and decrease in trade payables. These working capital trends should therefore be considered when evaluating earnings quality.

Earnings Forecast and Guidance

The full-year plan calls for Revenue of ¥1010.0B, Operating Income of ¥194.0B, and Net Income of ¥125.0B, representing expected increases of 16.1% and 9.6% YoY in Operating Income and Net Income, respectively. As of the first half, progress rates were 39.2% for Revenue, 13.3% for Operating Income, and 13.0% for Net Income, all substantially below the simple quarterly progress rate of 50%. This appears to assume a plan weighted toward the second half, making the pace of profit recovery in the second half an important confirmation point for achieving the plan. No revisions were made to either the earnings forecast or the dividend forecast.

Shareholder Returns

The interim dividend for Q2 was ¥9.5 per share, broadly flat compared with ¥9.4 in the same period of the prior year. The full-year dividend forecast is ¥19.0 per share. Based on estimated total dividends of approximately ¥43.0B, calculated from forecast full-year Net Income of ¥125.0B and 226.5 million shares outstanding, the full-year Payout Ratio is approximately 34.4%. Although the ratio of first-half total dividends of approximately ¥21.2B to first-half actual Net Income of ¥16.3B is high, this reflects the profit weighting between the first and second halves. It is therefore appropriate to evaluate the Payout Ratio on a full-year basis. No disclosure regarding share repurchases was made, and shareholder returns are centered on dividends.

Risk Factors

1. Profitability deterioration risk: The SG&A expense ratio rose from 41.4% in the prior year to 47.9%, lowering the Operating Income margin from 14.0% to 6.5%. If this cost structure does not improve in the second half, achievement of the full-year plan could be affected.

2. Working capital and liquidity risk: Inventories increased 23.6% YoY to ¥258.0B, while trade payables decreased 25.4% to ¥87.2B. As a result, short-term borrowings increased 64.3% YoY to ¥112.7B, confirming heightened short-term funding needs.

3. Goodwill impairment sensitivity: Goodwill of ¥518.8B represents 27.6% of total assets and 58.2% of net assets. If profitability continues to decline, impairment risk could materialize depending on the profitability of the relevant CGUs, requiring monitoring.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Both the Operating Income margin and Net Income margin were below the industry median, indicating that profitability was relatively low within the industry.

Growth and Capital Efficiency

The Revenue growth rate was substantially below the industry median, confirming that the Company also lagged its industry peers in terms of growth.

※Source: Compiled by the Company

Key Takeaways from the Earnings Release

1. The primary factor behind the deterioration in margins was the increase in the SG&A expense ratio, while the deterioration in the gross margin was limited. The simultaneous increase in SG&A expenses and decline in revenue created negative operating leverage, which can be viewed as the structural characteristic of this earnings release.

2. Inventories increased while trade payables declined, resulting in deteriorating working capital efficiency. This led to a decline in OCF and negative Free Cash Flow, making the future trend in cash-generation capacity a key point for monitoring.

3. Progress toward the full-year plan was approximately 13% for both Operating Income and Net Income, substantially below the simple progress rate of 50%. The plan assumes a second-half weighting, making the realization of profit recovery in the second half the key focus in assessing full-year performance.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly available data using a residual income model (Ohlson-type model with an explicit five-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥444–¥470 at ±1% for the Cost of Equity, and ¥455–¥459 at ±0.1 for ω.

Notes:

• Goodwill represents a high proportion of net assets, and the assumptions would change significantly if an impairment were recognized.
• Net assets as of the quarter-end were used; there is a timing difference relative to the full-year forecast.

(Calculation model: Residual Income Model / Interest rate reference month: 2026-07 / This value does not forecast or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. Industry benchmarks are reference information compiled by the Company based on publicly available earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q2 performance was weak, with a modest revenue decline translating into a disproportionate contraction in operating and net profit. Revenue was ¥39.57bn, down 2.9% year on year. Operating income fell 54.9% to ¥2.58bn. Net income declined 56.9% to ¥1.63bn. Gross profit decreased 4.6% to ¥21.67bn, materially less than the decline in operating profit. Consequently, gross margin remained comparatively resilient at 54.8%, only 100bp below the prior-year 55.8%. The main earnings pressure was below gross profit, as SG&A increased 12.3% year on year to ¥18.96bn while revenue declined. Operating margin therefore compressed by 750bp to 6.5% from 14.0%. Net margin compressed by 520bp to 4.1% from 9.3%. Finance costs of ¥0.69bn consumed 21% of EBIT, reflected in the 0.789 interest-burden ratio. The effective tax rate was 20.0%, and the tax burden of 0.800 was normal; taxation was not the driver of the profit decline. Operating cash flow of ¥2.92bn exceeded net income by 1.79x, supporting the cash realization of reported earnings. However, operating cash generation was supported by a ¥6.63bn receivables inflow and was materially offset by a ¥4.63bn inventory build and a ¥3.02bn decline in payables. Capital expenditure of ¥2.71bn exceeded operating cash flow, producing negative free cash flow of ¥0.13bn. The interim dividend of ¥9.50 per share implies a 132.2% dividend payout ratio against Q2 earnings and is not covered by free cash flow. Management retained its full-year forecast, but first-half progress was only 39.2% for revenue, 13.3% for operating income and 13.0% for net income, versus a standard 50% at Q2. The second half therefore requires a substantial earnings recovery, with the full-year plan implying operating income of ¥16.82bn and net income of ¥10.87bn after Q2. Balance-sheet liquidity is adequate on reported figures, but leverage, interest costs, unusually long working-capital duration and M&A-related intangible concentration remain material issues. Goodwill of ¥51.88bn equals 58.2% of equity, making preservation of acquired-business profitability important to avoid future impairment risk.

Profitability Analysis

Annualized DuPont ROE is 3.6%, comprising a 4.1% net profit margin, 0.422x annualized asset turnover and 2.10x financial leverage. The primary source of deterioration is margin compression rather than asset utilization or leverage: operating margin fell to 6.5% from 14.0%, while net margin fell to 4.1% from 9.3%. Gross margin was relatively stable at 54.8%, down 100bp year on year, indicating that the severe EBIT decline principally arose from operating-expense deleverage. SG&A rose 12.3% to ¥18.96bn despite a 2.9% revenue decline, reducing operating leverage materially. EBIT margin of 6.5% is below the 8-15% benchmark range and leaves limited buffer against demand, mix or cost volatility. Financial leverage of 2.10x supports the reported ROE mechanically, but does not offset the weak underlying profitability. The 0.789 interest burden confirms that financing costs reduced pre-tax earnings meaningfully: ¥0.69bn of finance costs exceeded finance income of ¥0.15bn. The 0.800 tax burden and 20.0% effective tax rate were reasonable, so the profit-before-tax to net-income conversion was not unusually weak. Annualized ROE of 3.6% and the quality-alert ROIC of 2.8% are both below normal return thresholds, indicating low returns on both shareholder and invested capital. The deterioration appears operationally significant rather than driven by identified exceptional income or losses. Sustained recovery requires SG&A growth to normalize relative to revenue and a restoration of operating margin.

Growth Assessment

Revenue declined 2.9% year on year to ¥39.57bn in Q2 cumulative terms, indicating that the current issue is not solely a cost-driven earnings miss. Gross profit declined more slowly than revenue, suggesting that overall gross-margin resilience partially mitigated the sales decline. Nevertheless, the growth-to-profit conversion was poor because SG&A expanded by ¥2.08bn year on year. Full-year guidance calls for revenue of ¥101.00bn, operating income of ¥19.40bn and net income of ¥12.50bn, with management making no forecast revision. Q2 cumulative revenue progress is 39.2%, 10.8 percentage points below the standard 50% pace. Operating-income progress is 13.3%, 36.7 percentage points below the standard pace. Net-income progress is 13.0%, 37.0 percentage points below the standard pace. To achieve the plan, the second half must generate ¥61.44bn of revenue, ¥16.82bn of operating income and ¥10.87bn of net income. This implies a sharply higher second-half operating margin than the 6.5% recorded in Q2 cumulative results. The reported addition of two newly consolidated subsidiaries may support revenue scale, but the current period does not demonstrate earnings accretion. The absence of a guidance revision preserves management confidence, but execution risk is elevated given the magnitude of required second-half margin recovery.

Financial Health

Financial health is supported by an equity ratio of 47.5% and total equity of ¥89.19bn. Reported current assets of ¥77.77bn exceed estimated current liabilities of approximately ¥35.48bn, implying a current ratio of about 2.19x and no current-ratio warning. Cash and cash equivalents were ¥27.25bn. Interest-bearing debt was ¥60.77bn, consisting of ¥11.27bn of short-term loans and ¥49.51bn of long-term loans, resulting in a debt-to-equity ratio of 1.10x and debt/capital of 40.5%. Debt-to-equity is above the conservative 1.0x benchmark but well below the 2.0x level that would indicate aggressive balance-sheet leverage. The short-term debt ratio was 18.5%, so the debt maturity profile is predominantly long term and does not indicate a severe maturity mismatch. The quality alert showing cash/short-term debt of 0.00x is inconsistent with the reported cash balance and ¥11.27bn short-term loans; on reported values, cash/short-term loans is approximately 2.42x. Accordingly, the reported data do not support a liquidity-stress conclusion, although cash deployment should be monitored given negative free cash flow and dividend payments. Short-term loans rose ¥4.41bn, or 64.3% year on year, while long-term loans rose ¥0.81bn. The increase in short-term borrowing, together with financing cash inflow of ¥2.49bn, indicates greater reliance on external funding during the period. Accounts payable fell ¥2.98bn, or 25.4%, which reduced supplier financing and contributed to operating cash-flow pressure. Lease liabilities totalled ¥6.15bn and should be considered alongside borrowings when assessing fixed financial commitments. Goodwill was ¥51.88bn, equivalent to 27.6% of assets and 58.2% of equity, exceeding the 50% warning threshold. This high goodwill concentration means a material portion of the equity base depends on the ongoing performance and valuation of acquired businesses.

Notable B/S Changes

Treasury stock: +¥4.00bn toward zero (99.9% reduction in the negative treasury-stock balance) - materially changed the capital-account composition. Short-term loans: +¥4.41bn (+64.3%) to ¥11.27bn - increased reliance on short-term funding despite adequate reported cash coverage. Accounts payable: -¥2.98bn (-25.4%) to ¥8.72bn - reduced supplier financing and contributed to operating working-capital cash outflow. Inventories: +¥4.93bn (+23.6%) to ¥25.80bn - near the 25% significance threshold and consistent with the elevated annualized DIO of 263 days; inventory conversion is a key cash-flow risk. Property, plant and equipment: +¥1.97bn (+7.4%) to ¥24.23bn - investment expanded the tangible asset base, while capital expenditure of ¥2.71bn exceeded free-cash-flow capacity. Goodwill: broadly unchanged at ¥51.88bn - the absolute balance remains significant at 27.6% of total assets and 58.2% of equity, requiring ongoing impairment monitoring.

Cash Flow Quality

Operating cash flow was ¥2.92bn, equivalent to 1.79x net income of ¥1.63bn; this exceeds the 0.8x quality threshold and indicates that reported earnings were converted into cash in the period. The accruals ratio was -0.7%, also consistent with acceptable earnings quality. However, the composition of cash flow requires attention. A ¥6.63bn reduction in receivables was the largest positive working-capital contributor. This was more than offset in part by a ¥4.63bn inventory increase and a ¥3.02bn reduction in payables. The resulting working-capital pattern indicates cash was tied up in inventory while supplier credit declined. Annualized DSO of 102 days exceeds the 60-day alert threshold, annualized DIO of 263 days exceeds both the 90-day and 60-day manufacturing thresholds, and the annualized cash conversion cycle of 276 days is far above the 120-day warning level. These quality alerts indicate a capital-intensive operating cycle and heighten the risks of inventory obsolescence, demand misalignment and further cash absorption if sales do not accelerate. Capital expenditure was ¥2.71bn, and investing cash flow was ¥3.05bn, including ¥0.31bn of intangible-asset purchases. Free cash flow was negative ¥0.13bn, so internally generated cash did not fully fund investment spending. Financing cash flow of ¥2.49bn, led by borrowing proceeds, supported the ¥2.98bn net increase in cash. The key cash-flow question for subsequent quarters is whether inventory converts into revenue and cash without requiring continuing debt-funded distributions or investment.

Dividend Sustainability

The Q2 dividend was ¥9.50 per share. Based on Q2 cumulative net income, the calculated dividend payout ratio was 132.2%, above the 100% warning threshold. Dividends paid were ¥2.12bn, exceeding net income of ¥1.63bn and negative free cash flow of ¥0.13bn. Free-cash-flow coverage was therefore negative at -0.06x. The distribution is not covered by current-period free cash flow after capital expenditure. The full-year dividend forecast is ¥19.00 per share, equal to the Q2 interim payment plus an implied ¥9.50 year-end payment. Against full-year forecast EPS of ¥55.27, the planned full-year dividend payout ratio is approximately 34.4%, which would be moderate if earnings guidance is achieved. Dividend sustainability is therefore principally contingent on the large required second-half earnings and cash-flow recovery. The period's financing cash inflow and higher short-term borrowings increase the importance of preserving operating cash conversion. No dividend-policy revision was announced.

Risk Assessment

Business risks include Demand and execution risk: revenue fell 2.9% year on year, while achieving full-year guidance requires ¥61.44bn of second-half revenue and a substantial margin recovery., Operating-cost risk: SG&A increased 12.3% despite lower revenue, driving a 750bp operating-margin contraction to 6.5%; failure to reverse this cost deleverage would impair forecast delivery., Manufacturing working-capital risk: annualized DSO of 102 days, DIO of 263 days and a 276-day cash conversion cycle indicate slow cash conversion and elevated inventory-obsolescence exposure., Acquisition integration and impairment risk: goodwill of ¥51.88bn is 58.2% of equity, making acquired-business performance and valuation assumptions material to future earnings and book value., Industry-specific analytical-instrument manufacturing risk: demand can be affected by customers' capital-expenditure cycles, research budgets, semiconductor and advanced-material investment trends, and the timing of large system deliveries..

Financial risks include Interest burden risk: the 0.789 interest-burden ratio means 21% of EBIT was consumed by net finance costs; lower operating profit would weaken debt-servicing headroom., Funding reliance risk: short-term loans increased 64.3% year on year and financing cash flow was positive ¥2.49bn while free cash flow was negative., Dividend funding risk: the 132.2% Q2 payout ratio and negative free-cash-flow coverage indicate that the interim distribution exceeded current-period earnings and post-capex cash generation., Supplier-financing risk: accounts payable declined 25.4%, reducing a source of operating funding and contributing to the long cash-conversion cycle..

Key concerns include Highest priority: recovery in operating margin and SG&A discipline, because operating-income progress is only 13.3% against the full-year forecast., High priority: inventory monetization and receivables collection, because the long cash conversion cycle could require additional funding if sales recovery is delayed., High priority: goodwill impairment sensitivity, given goodwill/ equity above the 50% warning benchmark., Moderate priority: interest-cost containment and the mix between short- and long-term funding., The liquidity-stress quality alert should be interpreted cautiously: reported cash of ¥27.25bn exceeds reported short-term loans of ¥11.27bn, so reported figures indicate cash/short-term loans of about 2.42x rather than 0.00x..

Investment Implications

Key takeaways include The central issue is operating deleverage: relatively stable gross margin was overwhelmed by SG&A growth, causing operating income to fall 54.9%., Reported operating cash flow exceeded net income, but cash flow was dependent on receivables collection and was offset by inventory accumulation and lower payables., Full-year guidance remains unchanged, but Q2 cumulative operating-profit and net-income progress are substantially below a normal first-half run rate., The balance sheet has a solid 47.5% equity ratio and predominantly long-term debt, but high goodwill concentration and rising short-term debt increase downside sensitivity., The interim dividend is not supported by current-period earnings or free cash flow; full-year sustainability depends on delivery of management's second-half plan..

Metrics to watch include Revenue growth and operating margin versus the 6.5% Q2 cumulative margin, SG&A growth relative to revenue growth, Inventory balance and annualized DIO of 263 days, Receivables balance and annualized DSO of 102 days, Operating cash flow and free cash flow after capital expenditure, Short-term borrowings, finance costs and interest-burden ratio, Goodwill balance, acquired-business performance and any impairment indicators, Progress toward full-year operating-income guidance of ¥19.40bn and net-income guidance of ¥12.50bn.

Regarding relative positioning, The company combines a high gross margin of 54.8%, characteristic of specialized technology-oriented manufacturing, with currently weak conversion into operating and shareholder returns: operating margin is 6.5%, annualized ROE is 3.6% and reported ROIC is 2.8%. Relative to standard manufacturing working-capital benchmarks, DSO, DIO and the cash conversion cycle are materially extended. Relative to balance-sheet benchmarks, the equity ratio is sound and debt/equity is manageable, but goodwill/equity above 50% is a clear M&A-related risk concentration.