SUMCO (3436) FY2026 Q2 Earnings Report

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Executive Summary

While the Company secured revenue growth during the period, a sharp deterioration in the cost ratio caused operating income, ordinary income, and net income to all turn from profits in the previous year to losses. The results therefore represent a deterioration in earnings despite higher revenue (a shift from profit to loss). Revenue was ¥215.02B (+4.7% year on year), operating income was ¥-6.36B (previous year: +¥7.46B), ordinary income was ¥-12.18B (previous year: +¥4.72B), and consolidated net income was ¥-12.95B (previous year: +¥3.32B). Net income attributable to owners of the parent was ¥-12.90B (previous year: +¥3.08B), while EPS was ¥-36.87 (previous year: +¥8.81). The primary factor was a decline in the gross profit margin caused by a higher cost-of-sales ratio (10.2%, compared with 18.2% in the previous year), which could not be fully offset by an improvement in the SG&A ratio (13.2%, compared with 14.5% in the previous year).

Factors Affecting Financial Performance

【Revenue】Revenue was ¥215.02B, representing an increase of +4.7% year on year. While volumes appear to have remained on an upward trend against a backdrop of firm demand for semiconductor silicon wafers, improvements in pricing, product mix, and capacity utilization were limited, and the pace of revenue growth remained moderate compared with the previous year's increase.

【Earnings】The gross profit margin declined significantly to 10.2% (previous year: 18.2%) due to the higher cost-of-sales ratio. Although the SG&A ratio improved to 13.2% (previous year: 14.5%), this was insufficient to absorb the deterioration in gross profit, and operating income turned into a loss of ¥-6.36B (previous year: +¥7.46B). In non-operating items, non-operating expenses of ¥7.04B, including interest expenses of ¥1.84B, exceeded non-operating income of ¥1.22B, causing ordinary income to deteriorate to ¥-12.18B (previous year: +¥4.72B). Following the recognition of ¥0.77B in income taxes, consolidated net income was ¥-12.95B (previous year: +¥3.32B). As earnings deteriorated despite higher revenue, the results can be characterized as higher revenue but lower earnings, with a shift from profit to loss.

Key Financial Indicators

【Profitability】The operating margin was -3.0% (previous year: +3.6%), the ordinary income margin was -5.7% (previous year: +2.3%), and the consolidated net profit margin was -6.0% (previous year: +1.6%), with all three shifting from positive to negative territory. ROE was -2.0%.

【Cash Flow Quality】Accounts receivable were ¥94.56B (previous year: ¥89.99B, +5.1%), while inventories were ¥26.49B (previous year: ¥26.17B, +1.2%). Both generally tracked revenue growth, and no sharp expansion in working capital was identified. However, the potential for reducing inventories and accounts receivable should be monitored as operating income has turned negative.

【Investment Efficiency】Total asset turnover was 0.189x (revenue of ¥215.02B ÷ total assets of ¥1,136.69B), remaining at the low level characteristic of capital-intensive industries. The negative ROE is attributable more to the deterioration in profit margins than to asset efficiency.

【Financial Soundness】The equity ratio declined slightly to 56.4% (previous year: 57.4%) but remained high. Cash and deposits increased to ¥89.77B (previous year: ¥67.30B, +33.4%), while long-term borrowings increased to ¥320.84B (previous year: ¥312.20B). Attention should therefore be paid to the continuing burden of ¥1.84B in interest expenses while operating income remains negative.

Cash Flow Analysis

As a standalone cash flow statement has not been disclosed, funding trends are assessed based on changes in the balance sheet. Cash and deposits increased by +¥22.47B (+33.4%) from the end of the previous year to ¥89.77B, while short-term securities also increased to ¥22.00B (previous year: ¥8.00B). Within fixed assets, construction in progress declined by ¥52.66B (▲42.7%) to ¥70.77B from ¥123.43B in the previous year, while machinery and equipment increased to ¥326.34B (+5.2%). This suggests that major investment projects may have entered the operating phase and that capital expenditure may have passed its peak. Interest-bearing debt increased modestly, with long-term borrowings at ¥320.84B (+2.8%) and short-term borrowings at ¥46.30B (+12.3%). Accordingly, liquidity on hand was increased through financing and restraint of investment spending despite operating losses. The increases in accounts receivable and inventories were broadly consistent with revenue growth, and no sharp expansion in working capital has been identified at this time.

Quality of Earnings

The deterioration in earnings during the period was not attributable to temporary factors such as extraordinary gains or losses, but primarily to a change in the recurring earnings structure, namely the decline in the gross profit margin caused by the higher cost-of-sales ratio (10.2%, compared with 18.2% in the previous year). Non-operating income of ¥1.22B, including interest income of ¥0.76B, was exceeded by non-operating expenses of ¥7.04B, including interest expenses of ¥1.84B. As a result, ordinary income was reduced by approximately ¥5.82B from operating income. Against pretax income of ¥-12.18B, income taxes of ¥0.77B were recorded, resulting in consolidated net income of ¥-12.95B. Comprehensive income was ¥-6.79B, and the loss narrowed relative to net income due to a positive contribution of +¥5.29B from foreign currency translation adjustments. The deterioration in earnings was therefore primarily due to weaker profitability in the core business and higher interest expenses, while the benefit from temporary accounting adjustments was limited.

Earnings Forecast and Guidance

First-half progress against the full-year earnings forecast was 64.6% for revenue, at ¥215.02B against the full-year forecast of ¥333.00B, exceeding the simple 50% progress benchmark. In contrast, operating income was ¥-6.36B against the full-year forecast of ¥-6.30B, representing 101% progress; ordinary income was ¥-12.18B against the full-year forecast of ¥-11.10B, representing 110% progress; and net income attributable to owners of the parent was ¥-12.90B against the full-year forecast of ¥-12.80B, representing 101% progress. Thus, all loss items had nearly exhausted or exceeded their full-year forecasts as of the first half. First-half EPS of ¥-36.87 also exceeded the full-year forecast of ¥-36.60 in terms of the loss amount. In light of the earnings forecast revision made during the quarter, improvement in profitability during the second half is a prerequisite for achieving the full-year plan.

Shareholder Returns

The Company paid an interim dividend of ¥10, while the year-end dividend for the fiscal year ending December 2026 remained undecided as of the date of this report. Since the Company recorded a net loss during the period, the payout ratio is mathematically negative and has limited informational value. The Company appears likely to determine the year-end dividend after assessing earnings and cash flow trends during the second half. No disclosure regarding shareholder returns other than dividends, such as share repurchases, has been identified.

Risk Factors

1. Profitability deterioration risk: The gross profit margin declined by approximately 8pt to 10.2% (previous year: 18.2%), and the operating margin deteriorated to -3.0% (previous year: +3.6%). The pace of gross margin deterioration substantially exceeded the improvement in the SG&A ratio (▲1.3pt), making a return to profitability difficult through cost structure improvements alone.

2. Interest burden and non-operating income/loss risk: Non-operating expenses of ¥7.04B, including interest expenses of ¥1.84B, exceeded non-operating income of ¥1.22B by ¥5.82B, causing ordinary income to deteriorate further from operating income. Given the level of interest-bearing debt, including long-term borrowings of ¥320.84B, the interest burden may continue to weigh on ordinary income if operating losses persist.

3. Working capital expansion risk: Accounts receivable increased to ¥94.56B (previous year: ¥89.99B, +5.1%), while inventories increased to ¥26.49B (previous year: ¥26.17B, +1.2%). Although these increases were broadly in line with revenue growth (+4.7%), delayed reductions in working capital while operating income remains negative could affect liquidity on hand.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Return

Both the operating margin and net profit margin were substantially below the industry median, placing the Company in the lower tier of the industry in terms of profitability.

Growth and Capital Efficiency

The revenue growth rate was also below the industry median, indicating that the Company's revenue growth was relatively moderate within the industry.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. Despite revenue growth of +4.7%, the gross profit margin deteriorated by 7.9pt (18.2%→10.2%), and operating income, ordinary income, and net income all shifted from profit to loss. This was the defining feature of the earnings results.

2. First-half progress against the full-year forecast reached 64.6% for revenue, while operating income, ordinary income, and net income all exceeded 100% in terms of progress toward their respective loss forecasts. Accordingly, improvement in profitability during the second half, including recovery in the gross profit margin, is a prerequisite for achieving the full-year plan.

3. The year-end dividend remains undecided. The Company intends to determine the dividend level after assessing earnings trends during the second half, meaning that the final shareholder return policy will depend on second-half performance.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade period). It is not a forecast of the market share price or a recommendation to take any specific investment action.

Sensitivity: ¥1,258–¥1,331 at ±1% for the cost of equity, and ¥1,277–¥1,305 at ±0.1 for ω.

Notes:

• Since forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used (there is a timing difference from the full-year forecast).
• Since net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual income model / Interest rate reference month: 2026-07 / This value does not forecast or guarantee the future share price)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary 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 responsibility, after consulting with professionals as necessary.

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AI Financial Analysis

Executive Summary

SUMCO’s FY2026 Q2 result was materially weak: modest sales growth did not prevent a return to operating and net losses as gross profitability deteriorated sharply. Revenue rose 4.7% year on year to ¥215.0bn. Gross profit fell 41.2% to ¥21.9bn despite the revenue increase. The gross margin contracted to 10.2% from 18.2% a year earlier, a deterioration of approximately 796bp. Cost of sales increased 14.9% year on year, substantially faster than revenue. SG&A declined 5.2% to ¥28.3bn, indicating that the operating loss was principally a gross-profit and utilization/cost-absorption issue rather than SG&A expansion. Operating income was a ¥6.4bn loss, versus a ¥7.5bn profit in the prior-year period. The operating margin consequently fell to negative 3.0% from positive 3.6%, a compression of about 659bp. Ordinary income was a ¥12.2bn loss, reflecting the operating loss and a ¥1.8bn interest expense. Net income attributable to owners was a ¥12.9bn loss, compared with a ¥3.1bn profit a year earlier, and EPS was negative ¥36.87. The effective tax rate was negative because tax expense of ¥0.8bn was recorded despite the pre-tax loss, further widening the net loss. The balance sheet remains liquid, with a 337.1% current ratio, ¥89.8bn of cash and deposits, and a 0.77x debt-to-equity ratio. However, debt service capacity is weak during the earnings downturn, as interest coverage was negative 3.45x. Manufacturing working-capital intensity is also elevated, with DSO of 80 days, DIO of 246 days and a 289-day cash conversion cycle. Management’s revised full-year forecast implies FY2026 revenue of ¥333.0bn, operating loss of ¥6.3bn and net loss attributable to owners of ¥12.8bn; the first-half operating and net losses have already essentially reached the full-year forecast losses. First-half revenue has achieved 64.6% of the full-year target, above the standard 50% midyear progress rate, while loss progress indicates management expects a substantial second-half earnings recovery. The ¥10.00 interim dividend was maintained, but the year-end dividend remains undecided, making shareholder-return visibility dependent on the pace of margin recovery and cash preservation.

Profitability Analysis

Annualized DuPont ROE was negative 4.0%, comprising a negative 6.0% net profit margin, 0.378x asset turnover and 1.77x financial leverage. The primary driver of the negative return was margin collapse rather than leverage: revenue increased 4.7%, but the gross margin fell 796bp to 10.2% and the operating margin turned negative 3.0%. Asset turnover of 0.378x remains low on an annualized basis, reflecting the group’s large production-asset base of ¥623.7bn in PPE, equal to 54.9% of total assets. Financial leverage of 1.77x is not excessive in isolation and is below levels typically associated with balance-sheet distress, but it magnifies negative shareholder returns while profitability is below the cost of debt. The ¥15.4bn year-on-year decline in gross profit more than explains the ¥13.8bn deterioration in operating income. Cost of sales rose ¥25.0bn, whereas revenue increased only ¥9.6bn, pointing to materially adverse cost absorption, pricing/mix, or wafer-industry utilization conditions. SG&A decreased by ¥1.5bn year on year, or 5.2%, and therefore provided partial cost discipline rather than being the cause of earnings weakness. Interest expense increased 36.7% year on year to ¥1.8bn, while interest income declined to ¥0.8bn, worsening the non-operating burden. The negative EBIT margin and negative interest coverage mean the reported 1.914x interest-burden factor is not economically indicative of healthy debt servicing, because both EBIT and pre-tax income are negative. ROIC of negative 1.4% is also below the 5% quality-alert threshold, showing that the capital-intensive production base is presently generating returns below an acceptable level. A sustainable recovery requires gross-margin restoration through improved utilization, product mix, pricing and cost absorption; SG&A reductions alone cannot offset the current gross-profit shortfall.

Growth Assessment

Top-line growth of 4.7% to ¥215.0bn demonstrates that sales volume and/or pricing improved modestly from the weak prior-year base. Nevertheless, the cost of sales increase of 14.9% shows that revenue growth is currently not translating into profitable growth. The difference between sales growth and cost growth caused gross profit to decline ¥15.4bn year on year. The manufacturing inventory profile is heavily weighted toward raw materials at ¥200.6bn, with work in process of ¥32.8bn and finished goods of ¥26.5bn. Raw materials represented approximately 77.2% of the disclosed manufacturing inventory balance, making earnings sensitive to input procurement, utilization decisions and production scheduling. Finished goods rose only 1.2% year on year and work in process increased 2.6%, while raw materials increased 4.2%; this does not by itself indicate a sharp finished-goods build, but the 246-day annualized DIO remains a material efficiency concern. The full-year revenue forecast of ¥333.0bn implies second-half revenue of about ¥118.0bn, below first-half revenue of ¥215.0bn. This forecast profile suggests that the revised outlook is not premised on a simple acceleration in reported sales, but rather on a meaningful improvement in cost absorption and profitability during the second half. Full-year operating loss guidance of ¥6.3bn is nearly identical to the first-half operating loss of ¥6.4bn, implying approximately break-even operating performance in the second half. Full-year net loss guidance of ¥12.8bn is also nearly reached by the first-half ¥12.9bn loss, implying limited additional net loss in the second half. The forecast was revised, which increases the importance of monitoring order trends, plant utilization, selling prices and gross-margin recovery against this implied second-half improvement.

Financial Health

Liquidity is strong on reported balance-sheet measures. The current ratio was 337.1% and the quick ratio was 318.4%, supported by current assets of ¥477.0bn against current liabilities of ¥141.5bn. Working capital was ¥335.5bn, providing a substantial short-term liquidity buffer. Cash and deposits increased ¥22.5bn year on year to ¥89.8bn, while short-term investment securities increased to ¥22.0bn from ¥8.0bn. Cash covered short-term loans by 1.94x, reducing immediate refinancing pressure. Short-term loans were ¥46.3bn, only 12.6% of total interest-bearing debt of ¥367.1bn; therefore, there is no apparent material maturity mismatch between near-term debt and current assets. Long-term loans were ¥320.8bn, representing the major portion of debt financing and 28.2% of total assets. Debt-to-equity was 0.77x and debt-to-capital was 36.4%, both within the stated conservative or investment-grade reference ranges. Total liabilities increased ¥15.4bn year on year while total equity declined ¥6.7bn to ¥641.1bn, reflecting the period loss and balance-sheet funding movements. The key financial-health concern is not liquidity but debt-service capacity: negative EBIT produced negative 3.45x interest coverage, below the 2.0x warning threshold. Interest expense rose to ¥1.8bn from ¥1.3bn a year earlier, increasing the earnings sensitivity of the capital structure. Deferred tax assets were ¥6.2bn, which remain a balance-sheet item to monitor if losses persist and future taxable-profit expectations weaken. Non-controlling interests of ¥72.9bn represent a meaningful component of total equity, so owners’ equity of ¥568.2bn is the more relevant equity base for attributable-return analysis.

Notable B/S Changes

Cash & deposits: +¥22.5bn (+33.4%) to ¥89.8bn - strengthens near-term liquidity and raises cash coverage of short-term loans to 1.94x. Construction in progress: -¥52.7bn (-42.7%) to ¥70.8bn - indicates a substantial reduction in the investment pipeline or completion/transfer of projects; future capacity-investment timing remains important. Total equity: -¥6.7bn (-1.0%) to ¥641.1bn - reflects the loss-making period and reduces the capital buffer modestly. Interest-bearing debt: +¥13.7bn (+3.9%) to ¥367.1bn - leverage remains moderate, but higher debt and interest expense amplify risk while EBIT is negative.

Cash Flow Quality

The reported data do not provide operating, investing or financing cash-flow amounts, so cash conversion and free-cash-flow coverage cannot be quantified. Balance-sheet movements nevertheless indicate that working-capital efficiency requires close attention. Accounts receivable increased 5.1% year on year to ¥94.6bn, and the reported annualized DSO of 80 days exceeds the 60-day quality-alert threshold. The DSO level raises the risk that cash collection trails revenue recognition during a period of weak profitability. Reported annualized inventory days of 246 are far above the 90-day warning threshold, indicating substantial capital tied up in the production and inventory cycle. The annualized cash conversion cycle of 289 days is also materially above the 120-day warning level. These working-capital metrics are especially significant for a semiconductor-wafer manufacturer because demand and utilization shifts can affect raw-material commitments and work-in-process duration before cash realization. Accounts payable increased 20.7% to ¥38.8bn, offering some supplier-financing offset, but this was insufficient to prevent the extended reported cash conversion cycle. Cash and deposits increased by ¥22.5bn to ¥89.8bn, which is positive for near-term liquidity, although the cash-flow source cannot be determined from the supplied figures. The absence of reported operating cash flow means the relationship between cash earnings and the ¥12.9bn net loss cannot be assessed directly. Similarly, free-cash-flow capacity to fund dividends, debt reduction and capital investment cannot be quantified from the disclosed figures.

Dividend Sustainability

SUMCO paid an interim dividend of ¥10.00 per share for FY2026. On the first-half loss attributable to owners, the calculated dividend payout ratio is negative 27.2%; this is not an economically meaningful earnings-coverage measure because EPS was negative ¥36.87. The interim dividend cash commitment is approximately ¥3.5bn based on 350.18 million issued shares. The group has substantial balance-sheet liquidity, including ¥89.8bn in cash and deposits and a 337.1% current ratio, which supports the capacity to make the interim distribution. However, negative operating income, negative annualized ROE and negative interest coverage make dividend funding from recurring earnings unavailable in the first half. The year-end FY2026 dividend is undecided, and management has explicitly not provided a year-end DPS forecast. Accordingly, dividend sustainability will depend on the implied second-half operating recovery, working-capital cash release or containment, and management’s capital-allocation priorities. With no disclosed cash-flow totals, free-cash-flow coverage of dividends cannot be assessed. The retained earnings balance of ¥244.1bn provides legal and accounting capacity, but preservation of financial flexibility is likely to remain a key consideration while losses persist.

Risk Assessment

Business risks include Semiconductor-wafer cycle and utilization risk: gross margin declined to 10.2% from 18.2%, indicating high earnings sensitivity to volume, pricing and fixed-cost absorption., Manufacturing working-capital risk: annualized DSO of 80 days, DIO of 246 days and a 289-day cash conversion cycle indicate a long conversion of production investment into cash., Raw-material and production-planning risk: disclosed raw materials of ¥200.6bn are the largest inventory component, increasing exposure to input costs, utilization shifts and inventory-management execution., Capital-intensity risk: PPE of ¥623.7bn equals 54.9% of total assets, so underutilization can materially depress returns and margins., Second-half recovery execution risk: full-year guidance implies a near break-even second half after a ¥6.4bn first-half operating loss..

Financial risks include Debt-service risk: interest coverage was negative 3.45x because EBIT was negative, despite a manageable 0.77x debt-to-equity ratio., Higher funding-cost risk: interest expense increased 36.7% year on year to ¥1.8bn while interest income declined., Earnings-driven equity erosion risk: total equity declined ¥6.7bn year on year to ¥641.1bn and owners' equity declined to ¥568.2bn., Dividend flexibility risk: the interim ¥10.00 DPS was paid during a loss period and the year-end dividend remains undecided..

Key concerns include High impact/high likelihood: gross-margin recovery is essential, as the 796bp year-on-year contraction was the central cause of the earnings reversal., High impact/medium likelihood: continued weak utilization could sustain negative ROIC of 1.4% and negative annualized ROE of 4.0%., Medium-to-high impact/medium likelihood: elevated receivable and inventory days could constrain cash generation even if revenue stabilizes., Medium impact/medium likelihood: long-term debt of ¥320.8bn is serviceable from a liquidity perspective, but becomes more burdensome if operating losses extend..

Investment Implications

Key takeaways include Revenue growth has not converted into earnings: sales rose 4.7%, but operating income deteriorated from a ¥7.5bn profit to a ¥6.4bn loss., The main operating issue is gross-margin compression to 10.2%, rather than SG&A inflation, as SG&A fell 5.2% year on year., Liquidity and near-term debt maturity coverage are robust, with a 337.1% current ratio and cash equal to 1.94x short-term loans., Debt service is the principal balance-sheet vulnerability during the downturn because interest coverage is negative 3.45x., FY2026 guidance embeds a substantial second-half improvement because first-half operating and net losses have already effectively reached the full-year forecast losses., The interim dividend was maintained at ¥10.00 per share, but the absence of year-end dividend guidance leaves total FY2026 shareholder returns uncertain..

Metrics to watch include Gross margin and operating margin relative to the first-half 10.2% and negative 3.0% levels, Second-half operating income versus the implied approximately break-even outcome embedded in FY2026 guidance, Annualized DSO, DIO and cash conversion cycle relative to 80 days, 246 days and 289 days, Interest expense and interest coverage as long-term loans stand at ¥320.8bn, Cash and deposits, short-term investment securities and any working-capital release, Year-end dividend announcement and the relationship between dividends, recurring earnings and cash generation.

Regarding relative positioning, SUMCO combines a strong short-term liquidity position and moderate balance-sheet leverage with weak current operating efficiency. Its capital-intensive manufacturing base and long working-capital cycle make it more sensitive to semiconductor-wafer demand, utilization and margin normalization than an asset-light technology supplier.