NITTO BOSEKI (3110) FY2027 Q1 Earnings Report

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Executive Summary

In addition to revenue growth centered on the Electronic Materials Business, significant margin improvement resulting from the emergence of operating leverage was the most important point of the quarter. Revenue was ¥340.3B (+20.6% year on year), Operating Income was ¥79.4B (+84.8%), Ordinary Income was ¥84.3B (+94.1%), and net income attributable to owners of the parent was ¥58.0B (+84.2%). Operating Income growth of 84.8% substantially exceeded revenue growth of 20.6%, and as the expansion in gross profit outpaced the increase in SG&A expenses, the operating margin improved by 810bp year on year to 23.3%.

Factors Affecting Financial Results

【Revenue】Revenue was ¥340.3B (+20.6% year on year), with all segments recording revenue growth. The core Electronic Materials Business generated ¥180.8B (+25.9%), accounting for 53.1% of consolidated revenue and serving as the primary driver of growth. The Insulation Materials Business also posted strong growth of ¥44.0B (+24.1%), while Materials & Chemicals recorded ¥31.4B (+14.0%), Composites ¥40.9B (+14.6%), Medical ¥38.5B (+7.6%), and Other ¥67.8B (+29.8%), with all businesses securing revenue growth.

【Profit and Loss】Operating Income was ¥79.4B (+84.8%), primarily due to the improvement in the gross profit margin to 43.8% from 37.9% in the same period of the previous year. SG&A expenses were ¥69.7B, remaining below the pace of revenue growth, and operating leverage became evident. Ordinary Income was ¥84.3B (+94.1%), boosted by ¥7.5B in non-operating income, including ¥3.3B in dividend income received and ¥2.5B in foreign exchange gains, in addition to Operating Income. Extraordinary income and losses were limited, comprising a ¥0.1B gain on the sale of fixed assets and ¥0.8B in losses on the disposal of fixed assets and other items, resulting in a limited impact on profit before taxes. Net income attributable to owners of the parent was ¥58.0B (+84.2%), representing results characterized by both revenue and profit growth.

Segment Analysis

The Electronic Materials Business recorded revenue of ¥180.8B (+25.9%) and Operating Income of ¥70.4B (+70.0%). Its profit margin on external sales was 38.9%, the highest among all segments, and it accounted for 83.5% of total consolidated segment profit of ¥84.3B. The Medical Business posted revenue of ¥38.5B (+7.6%) and profit of ¥7.0B (+67.1%), with its profit margin improving to 18.3%. The Insulation Materials Business generated revenue of ¥44.0B (+24.1%) and profit of ¥2.5B, achieving a return to profitability from a loss in the same period of the previous year. The Composites Business recorded revenue of ¥40.9B (+14.6%), with profit improving to approximately breakeven (¥0.0B) and exiting the loss-making position of the previous year. The Materials & Chemicals Business recorded revenue of ¥31.4B (+14.0%) and profit of ¥2.2B (+103.7%). Overall, the Company has a structure characterized by a high degree of earnings dependence on the Electronic Materials Business, and demand trends in that business will determine consolidated profitability.

Key Financial Indicators

【Profitability】The operating margin of 23.3% (equivalent to 15.2% in the same period of the previous year) and net profit margin of 17.0% (equivalent to 11.2%) both improved significantly. Starting from a gross profit margin of 43.8%, the containment of SG&A expenses contributed to the increase in profit margins. Basic EPS was ¥31.85 (¥17.29 in the previous year, +84.2%).【Cash Quality】Cash and deposits were ¥454.8B, representing 30.1% of current assets and indicating a substantial level of liquidity. Accounts receivable of ¥382.8B and inventories of ¥166.4B indicate an accumulation of working capital, resulting in funds being tied up during the revenue growth phase.【Investment Efficiency】ROE was 3.3% (based on quarterly results), while investment securities of ¥280.3B accounted for 10.0% of total assets, reflecting a structure in which changes in valuation differences affect net assets and comprehensive income.【Financial Soundness】With an Equity Ratio of 65.6%, current assets of ¥1511.6B, and current liabilities of ¥402.7B, the financial foundation is robust. Although interest-bearing debt includes long-term borrowings of ¥270.2B and bonds of ¥100.0B, interest expense of ¥1.9B is limited relative to Operating Income of ¥79.4B, indicating a limited interest burden.

Cash Flow Analysis

As the cash flow statement has not been disclosed, cash flow trends are analyzed based on changes in the balance sheet. Cash and deposits declined to ¥454.8B from ¥620.1B in the same period of the previous year, while accounts receivable increased to ¥382.8B from ¥368.0B and inventories increased to ¥166.4B from ¥160.1B. This suggests that the accumulation of working capital accompanying revenue growth may be placing pressure on cash balances. Accounts payable increased to ¥103.0B from ¥80.2B, with the expansion of trade payables providing a certain funding benefit. Property, plant and equipment increased to ¥915.7B from ¥875.6B, indicating that capital expenditures have continued. Retained earnings accumulated to ¥1186.2B from ¥1164.6B, indicating continued retention of profits. Overall, the Company is in a phase in which expanding earnings are being reallocated to working capital and capital expenditures, and the decline in the cash balance itself from the previous year is a point to monitor in assessing funding trends.

Earnings Quality

Ordinary Income was ¥84.3B compared with Operating Income of ¥79.4B. The ¥4.9B difference was primarily attributable to ¥7.5B in non-operating income, led by ¥3.3B in dividend income received and ¥2.5B in foreign exchange gains, while non-operating expenses remained limited to ¥2.6B, mainly comprising ¥1.9B in interest expense. The ¥2.5B foreign exchange gain was equivalent to 3.1% of Operating Income and represents a tailwind from outside the core business; therefore, it should be assessed separately from Operating Income-based performance. Extraordinary income and losses were limited in scale, comprising extraordinary income of ¥0.1B and extraordinary losses of ¥0.8B, and temporary factors had a limited impact on net income for the period. Comprehensive income was ¥75.0B, and the ¥14.8B difference from net income of ¥60.2B was primarily due to a ¥13.2B increase in valuation differences on securities, reflecting the expansion of unrealized gains resulting from market price movements. It should be noted that the difference between net income and comprehensive income may reverse depending on future market conditions.

Earnings Forecast and Guidance

The full-year Company forecast calls for revenue of ¥1410.0B (+19.3% year on year), Operating Income of ¥300.0B (+44.1%), and Ordinary Income of ¥300.0B (+39.2%), and the earnings forecast was revised during the quarter. Q1 progress rates were 24.1% for revenue and 26.5% for Operating Income, with Operating Income exceeding the standard quarterly progress benchmark of 25%. The Q1 operating margin of 23.3% exceeded the full-year forecast operating margin of 21.3% (¥300.0B ÷ ¥1410.0B), making the sustainability of the profit margin from the second quarter onward a key focus. Against forecast EPS of ¥109.87, Q1 actual EPS of ¥31.85 represents approximately 29.0% progress.

Shareholder Returns

The annual dividend forecast is ¥28.00 per share, based on the post-split basis following the stock split of five shares for each share effective July 1, 2026, and there was no revision to the dividend forecast during the quarter. The forecast Payout Ratio against full-year forecast EPS of ¥109.87 is approximately 25.5%. Together with accumulated retained earnings of ¥1186.2B, this provides a reasonable foundation for the dividend. It is noted that the annual dividend would be ¥140.00 without taking the stock split into account.

Risk Factors

1. Earnings dependence on the Electronic Materials Business: This business accounts for 83.5% of total segment profit and has an exceptionally high profit margin on external sales of 38.9%. Changes in demand cycles, pricing, and product mix in this business could have a significant impact on the consolidated operating margin.

2. Expansion of working capital: Accounts receivable of ¥382.8B and inventories of ¥166.4B increased by ¥38.0B and ¥6.3B, respectively, from the same period of the previous year. The accumulation of working capital accompanying revenue growth is placing pressure on the cash balance, which declined by ¥165.4B year on year to ¥454.8B, necessitating monitoring of funding efficiency.

3. Impact of securities valuation and foreign exchange: Investment securities of ¥280.3B account for 10.0% of total assets and include valuation differences of ¥122.4B. The ¥2.5B foreign exchange gain is a factor boosting Ordinary Income, but its recurrence depends on market conditions and could have the opposite effect in a stronger-yen environment.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company’s operating margin and net profit margin both substantially exceed the industry median, placing its profitability at a high level within the industry.

Growth and Capital Efficiency

The revenue growth rate also substantially exceeds the industry median, placing the Company among the industry leaders in both profitability and growth.

※Source: Compiled by the Company

Key Points from the Financial Results

1. The operating margin of 23.3% (+810bp year on year) generated profit growth of 84.8%, exceeding revenue growth of 20.6%. The improvement in business mix centered on the Electronic Materials Business and the emergence of operating leverage can be observed as structural improvements in profitability.

2. The progress rate of 26.5% against the full-year Operating Income forecast exceeds the standard quarterly progress benchmark. The fact that the high Q1 profit margin of 23.3% exceeds the assumed full-year forecast margin of 21.3% is a key point to monitor going forward.

3. The expansion of working capital accompanied by increases in accounts receivable and inventories, together with the year-on-year decline in cash balances, should be observed as a change in funding efficiency during the revenue growth phase and will be a monitoring point for future funding trends.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,050–¥1,112 at ±1% for the cost of equity, and ¥1,079–¥1,083 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter are used (there is a time-period discrepancy with the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; it is not a forecast of the market share price or a recommendation of any specific investment action, and 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 flash report data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with a professional as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a very strong start, with revenue growth translating into disproportionately higher operating and net profit. Revenue increased 20.6% YoY to ¥34.0bn. Operating income rose 84.8% YoY to ¥7.9bn, while ordinary income increased 94.1% to ¥8.4bn. Profit attributable to owners rose 84.2% to ¥5.8bn. Gross profit increased 38.9% to ¥14.9bn, materially outpacing sales growth. The gross margin expanded by 578bp YoY to 43.8% from 38.0%. Operating margin expanded by 812bp YoY to 23.3% from 15.2%. Net margin expanded by 588bp YoY to 17.0% from 11.2%. This margin progression reflects substantial operating leverage, as SG&A increased only 8.2% YoY, well below revenue growth. Electronic Materials was the core business, generating ¥7.0bn of segment profit, or approximately 83% of aggregate segment profit before corporate adjustments. Profit growth was also broad-based, with Medical, Materials & Chemicals, Insulation and Other businesses all contributing higher earnings. Insulation returned from a ¥0.5bn segment loss to ¥2.5bn profit, providing an additional source of earnings breadth. Non-operating income of ¥0.7bn was supportive but modest at 2.2% of revenue, indicating that the earnings acceleration was primarily operating-led. The Q1 operating-income progress rate of 26.5% is 1.5ppt above the normal 25% seasonal benchmark against the ¥30.0bn full-year forecast. Net-income progress of 29.0% against the full-year forecast is also ahead of a standard Q1 run rate. The balance sheet remains conservatively capitalized, with a 375.3% current ratio, 0.52x reported D/E and 14.1% debt/capital. The central issue to monitor is working-capital intensity, particularly the quality-alert measures for receivables, inventories and the cash-conversion cycle. Management has revised its earnings forecast, and the strong first-quarter delivery establishes a favorable starting point relative to the revised full-year plan.

Profitability Analysis

Annualized DuPont ROE is 12.6%, decomposed into a 17.0% net profit margin, 0.485x annualized asset turnover and 1.52x financial leverage. The principal improvement driver is margin rather than leverage: the operating margin rose 812bp YoY to 23.3%, and the net margin increased 588bp to 17.0%. Gross-margin expansion of 578bp to 43.8% shows that the gain began at the gross-profit level, consistent with favorable product mix, pricing and/or utilization in higher-value businesses. SG&A rose 8.2% YoY to ¥7.0bn versus 20.6% sales growth, producing strong positive operating leverage; SG&A/revenue declined to 20.5% from 22.8%, a 230bp improvement. The core Electronic Materials business recorded ¥14.6bn of external sales (+29.5% YoY) and ¥7.0bn of segment profit (+70.0%), with its segment margin rising to 48.2% from 36.8%. Medical posted ¥3.8bn of sales (+6.9%) and ¥0.7bn of profit (+67.1%), lifting segment margin to 18.5% from 11.8%. Composites sales rose 15.9% to ¥3.8bn and segment profit reached break-even, improving from a ¥0.2bn loss. Materials & Chemicals increased sales 15.4% to ¥2.6bn and more than doubled segment profit to ¥0.2bn, raising margin to 8.5% from 4.8%. Insulation sales grew 24.2% to ¥4.4bn and segment profit turned to ¥0.3bn from a ¥0.5bn loss. Other businesses increased sales 11.8% to ¥4.8bn and segment profit 90.2% to ¥0.2bn. Financial leverage is moderate rather than aggressive, so annualized ROE is principally being generated by operating profitability. The tax burden was 0.694 and the effective tax rate was 27.9%, broadly consistent with a normal Japanese corporate tax profile. Interest burden exceeded 1.0x because ordinary non-operating income exceeded net interest and other non-operating costs; interest coverage was very strong at 40.94x. The durability of the current margin level depends especially on continued Electronic Materials demand and on sustaining the Q1 turnaround in Insulation.

Growth Assessment

Q1 revenue growth of 20.6% was led by Electronic Materials at +29.5% YoY and Insulation at +24.2%, while all reported businesses delivered positive external-sales growth. Aggregate segment profit increased 78.7% to ¥8.4bn before corporate adjustments, demonstrating that growth was accompanied by materially stronger profitability rather than sales expansion alone. Electronic Materials contributed approximately 62% of the incremental segment profit and remains the key determinant of group earnings momentum. The breadth of improvement is constructive: Medical profit rose 67.1%, Materials & Chemicals profit increased 103.7%, and Insulation moved into profit. The FY2027 full-year forecast calls for revenue of ¥141.0bn (+19.3% YoY), operating income of ¥30.0bn (+44.1%) and ordinary income of ¥30.0bn (+39.2%). Q1 represents 24.1% of the sales forecast, slightly below a standard 25% pace, whereas operating income represents 26.5% and ordinary income 28.1%, both ahead of the standard pace. This implies the forecast anticipates some moderation in margin or mix after Q1, despite continued top-line expansion. Q1 profit attributable to owners represents 29.0% of the ¥20.0bn full-year forecast. Non-operating income included ¥0.3bn of dividend income and ¥0.2bn of FX gains, but these were not large enough to alter the conclusion that operating execution drove growth. Extraordinary items were immaterial, with a ¥0.1bn loss on disposal of fixed assets substantially offsetting a small ¥0.1bn gain on asset sales. Construction in progress of ¥11.7bn, equivalent to 12.8% of PPE, indicates an active manufacturing investment pipeline that could support capacity and product-mix development when commissioned.

Financial Health

Liquidity is very strong. Current assets of ¥151.2bn exceeded current liabilities of ¥40.3bn by ¥110.9bn, producing a 375.3% current ratio and a 334.0% quick ratio. Cash and deposits of ¥45.5bn were 14.04x short-term loans of ¥3.2bn, providing substantial near-term refinancing flexibility. The reported short-term debt ratio is only 10.7%, limiting maturity-mismatch risk because the liability structure is predominantly long term. Long-term loans were ¥27.0bn and bonds payable were ¥10.0bn, while reported interest-bearing debt was ¥30.3bn. Solvency metrics are conservative, with reported D/E of 0.52x, debt/capital of 14.1%, total liabilities/total assets of 34.4%, and equity of ¥183.9bn. Interest coverage of 40.94x indicates a large earnings buffer over interest expense. Cash and deposits decreased ¥16.5bn YoY (-26.7%) to ¥45.5bn, which should be assessed alongside ongoing investment needs and the working-capital profile. Accounts payable increased ¥2.3bn (+28.5%) to ¥10.3bn, increasing supplier financing within current liabilities. Short-term loans declined ¥1.2bn (-26.2%) to ¥3.2bn, partly reducing short-term funding reliance. PPE represented 32.7% of total assets and investment securities represented 10.0%, indicating a capital-intensive operating base alongside a material investment portfolio. Accumulated other comprehensive income reached ¥22.6bn, including ¥12.2bn of valuation gains on securities, which provides equity support but also exposes book value to market-price movements.

Notable B/S Changes

Cash & deposits: -¥16.5bn (-26.7% YoY) to ¥45.5bn - liquidity remains strong, but lower cash heightens the importance of working-capital discipline and investment funding. Accounts payable: +¥2.3bn (+28.5% YoY) to ¥10.3bn - greater supplier financing supports near-term operating funding; future payment normalization could use cash. Short-term loans: -¥1.2bn (-26.2% YoY) to ¥3.2bn - reduced short-term borrowing improves the maturity profile and is consistent with the low 10.7% short-term debt ratio.

Cash Flow Quality

Dividend Sustainability

The FY2027 forecast dividend is ¥28.0 per share on a post-stock-split basis, compared with forecast EPS of ¥109.87. The implied forecast dividend payout ratio is approximately 25.5%, which is conservative relative to the 60% sustainability benchmark. The stated forecast dividend is equivalent to ¥140 per pre-split share, comprising an indicated ¥60 interim dividend and ¥80 year-end dividend before reflecting the five-for-one stock split. Q1 EPS was ¥31.85, and the full-year EPS forecast implies that management expects earnings to remain well supported through the remainder of the year. Retained earnings of ¥118.6bn and total equity of ¥183.9bn provide a substantial balance-sheet buffer for the dividend policy. The low forecast payout ratio leaves flexibility for manufacturing investment, balance-sheet management and future shareholder returns. No total return ratio is calculated because share repurchases are not included in the provided capital-return information.

Risk Assessment

Business risks include Electronic Materials concentration: the segment generated approximately 83% of aggregate segment profit before corporate adjustments. Its ¥7.0bn profit and 48.2% segment margin make group earnings highly sensitive to electronics-cycle demand, customer inventory adjustments, product mix and pricing., Working-capital intensity: the quality alerts show DSO of 103 days, above the 60-day warning threshold. Slow collections can delay cash realization from the strong Q1 revenue growth and raise sensitivity to customer credit conditions., Inventory risk: one quality alert reports DIO of 306 days and another reports DIO of 79 days, both above their respective warning thresholds of 90 and 60 days. The measures use different reported scopes or calculation bases, but each signals inventory intensity that could expose the company to demand volatility, obsolescence and future inventory valuation pressure., Cash-conversion-cycle risk: the 360-day quality-alert CCC materially exceeds the 120-day warning threshold. This combines extended receivables and inventory holding periods and can make operational cash generation more volatile than accounting earnings., Manufacturing execution risk: construction in progress of ¥11.7bn, or 12.8% of PPE, represents a meaningful investment pipeline. Delays, cost overruns, ramp-up inefficiency or lower-than-planned utilization could defer returns on this capital., Foreign-exchange and market risk: Q1 included ¥0.2bn of FX gains, while accumulated valuation gains on securities amounted to ¥12.2bn. Currency movements and equity-market prices can affect non-operating earnings and comprehensive income..

Financial risks include Cash and deposits declined 26.7% YoY to ¥45.5bn. Liquidity remains strong, but the cash reduction increases the importance of disciplined working-capital and investment management., Accounts payable rose 28.5% YoY to ¥10.3bn. The increase supports operating funding in the short term, but a reversal in supplier-credit terms could require additional cash., Debt risk is currently contained: reported D/E is 0.52x, debt/capital is 14.1%, the current ratio is 375.3%, and interest coverage is 40.94x. The main financial risk is therefore cash-conversion execution rather than immediate solvency pressure., Investment securities of ¥28.0bn equal 10.0% of total assets, creating potential balance-sheet and OCI volatility from changes in market valuations..

Key concerns include Highest priority: conversion of Q1 earnings into cash given the explicit 103-day DSO, 79-day and 306-day inventory-day alerts, and 360-day CCC alert. These indicators should be evaluated through subsequent movements in receivables, inventories, payables and cash., High priority: sustainability of the Electronic Materials margin, which expanded sharply and underpins the majority of segment profit., Medium priority: whether the Insulation profit turnaround and broad segment-margin gains can be maintained as volume, pricing and input-cost conditions normalize., Medium priority: execution and returns on the substantial construction-in-progress balance..

Investment Implications

Key takeaways include Q1 operating income grew 84.8% YoY, far faster than the 20.6% revenue increase, driven by a 812bp operating-margin expansion to 23.3%., Electronic Materials is the core earnings engine, with ¥14.6bn of sales, ¥7.0bn of segment profit and a 48.2% segment margin., The earnings improvement was broad-based, including a return to profitability in Insulation and material margin gains in Medical and Materials & Chemicals., Annualized ROE of 12.6% is good but remains below the 15% excellent benchmark; further improvement depends primarily on sustaining profit margins and asset efficiency rather than increasing leverage., Balance-sheet risk is low on reported liquidity and leverage metrics, while working-capital intensity is the central operational and cash-conversion issue., The forecast dividend payout ratio of approximately 25.5% appears conservatively positioned relative to forecast earnings and equity resources..

Metrics to watch include Electronic Materials external-sales growth and segment margin relative to the Q1 level of 48.2%, Group operating-margin trajectory versus Q1's 23.3%, Receivable days, inventory days, cash-conversion cycle and cash-and-deposit movements, Insulation segment profitability after the Q1 turnaround to ¥0.3bn profit, Construction-in-progress commissioning, capital-spending execution and subsequent PPE productivity, FY2027 forecast progress: revenue 24.1%, operating income 26.5%, ordinary income 28.1%, and profit attributable to owners 29.0% at Q1.

Regarding relative positioning, The company combines excellent Q1 margins, strong interest coverage and conservative reported leverage with a capital-intensive manufacturing base. Its profitability profile is currently stronger than the stated operating-margin and net-margin excellence benchmarks, while annualized ROE is in the good 10-15% range rather than above the 15% excellent threshold. Relative positioning will depend on whether high-value Electronic Materials earnings and the broad segment recovery can be converted into cash without further extension of the working-capital cycle.