PCI Holdings,INC. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥13.61B
• Operating Income: ¥766M
• Net Income: ¥529M
• EPS: ¥53.40

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Solid topline and operating execution with a clean P/L, but Q2 cash flow softness drags earnings quality and keeps our stance cautious into H2. Revenue reached 136.11, producing gross profit of 32.18 and operating income of 7.66, with ordinary income at 7.91 and net income at 5.28. Operating margin is approximately 5.6% (7.66/136.11), ordinary margin 5.8%, and net margin 3.9%. Gross margin is 23.6%, reflecting reasonable pricing and mix given the SI/embedded software profile. Non-operating impact was small and positive (income 0.29 vs expenses 0.03), adding modestly to ordinary profit. Expense discipline looks decent with SG&A of 24.51 (about 18.0% of revenue), leaving room for operating leverage if H2 revenue scales. Interest burden is negligible (interest expense 0.02) with interest coverage at a very strong 424x. Balance sheet is healthy: current ratio 235% and quick ratio 211% indicate ample liquidity; long-term loans are modest at 2.50 and overall D/E is 0.64x. However, operating cash flow was -2.32, resulting in OCF/Net Income of -0.44, which is below the >1.0 quality benchmark and triggers an earnings quality flag. Based on OCF and reported capex, core FCF (OCF minus capex) is roughly -2.68, implying external funding or cash on hand likely supported dividends and financing outflows this half. ROE is 5.4% (DuPont: 3.9% margin × 0.854 asset turnover × 1.64x leverage), and ROIC is reported at 7.8%, roughly in line with common management targets for value creation threshold. Goodwill (14.17) and intangibles (15.14) together form about 18.6% of total assets, posing a medium-term impairment risk if growth or margins weaken. Margin expansion or compression versus prior periods cannot be quantified due to lack of disclosed YoY or sequential data; hence bps changes are N/A. The effective tax rate of 33.8% is within a normal range, suggesting no unusual tax items. Forward-looking, stabilization of working capital and a typical H2 seasonal uptick will be key to restore cash conversion. We will watch receivables collection and utilization rates to assess whether the negative OCF was a timing issue versus structural.

Profitability Analysis

ROE decomposition: Net Profit Margin 3.9% × Asset Turnover 0.854 × Financial Leverage 1.64x = ROE 5.4%. The weakest link in the chain is the net profit margin at 3.9%, characteristic of SI/embedded engineering businesses with high personnel costs. Asset turnover at 0.854 indicates moderate efficiency; leverage at 1.64x is conservative, so ROE is primarily margin- and turnover-driven rather than leverage-driven. The largest driver of profitability this quarter is operating efficiency: SG&A was 24.51 (18.0% of revenue), allowing a 5.6% operating margin; non-operating items were not a material swing factor. Business reasons: labor cost inflation and project delivery mix constrain gross margin (23.6%), while stable SG&A control supports operating margin. Sustainability: with a solid pipeline, margins can hold if utilization remains high; however, wage inflation and pricing pressure could cap upside. Watch for negative signals such as SG&A growth outpacing revenue growth; data to compare YoY is not disclosed, so this risk cannot be confirmed but remains a monitoring point. Overall, ROE is adequate but not high; improving cash conversion and asset turnover (through tighter working capital) would most effectively lift ROE.

Growth Assessment

Revenue of 136.11 suggests steady demand; lack of YoY metrics limits growth quantification. Profit quality appears predominantly recurring (project-based services) with minimal reliance on non-operating gains (non-operating income ratio 5.4% of operating income). EBITDA of 8.39 implies EBITDA margin near 6.2%, offering limited buffer against execution slippage. With ROIC at 7.8%, the business clears a typical cost-of-capital threshold, indicating value creation if sustained. Outlook hinges on H2 seasonality common in IT services—potential for stronger recognition and improved cash conversion as projects complete. Mix improvements (higher value-added engineering, recurring maintenance, and solutions) would support gross margin durability. Hiring and wage trajectories will be key; retention and utilization management should drive incremental operating leverage if revenue scales. Given elevated goodwill/intangibles, inorganic growth has been used; integration quality and synergies affect out-year growth. Overall, revenue sustainability looks reasonable, but proof will be in H2 backlog conversion and cash collection.

Financial Health

Liquidity is strong: current ratio 235.1% and quick ratio 210.9%, with cash and deposits of 34.75 and receivables of 47.38 comfortably covering current liabilities of 52.33. No warning triggers: Current Ratio well above 1.0 and D/E at 0.64x is conservative. Interest coverage is extremely strong at 424x, reflecting minimal interest burden. Maturity mismatch risk is low; current assets (123.04) far exceed current liabilities. Long-term loans total 2.50, and total liabilities 61.93 vs equity 97.38 indicate a solid capital structure. Off-balance sheet obligations are not disclosed; no specific commitments or guarantees were reported in the provided data. Intangible asset load (goodwill 14.17, intangibles 15.14) is notable but within manageable bounds given equity size, though it raises impairment sensitivity in downturns.

Cash Flow Quality

OCF/Net Income is -0.44x, below the 0.8 threshold and flagged as a quality issue. Operating CF was -2.32 despite net income of 5.28, indicating working capital absorption (likely receivables and/or inventory build typical in H1 project cycles). Core FCF (OCF – capex) is approximately -2.68 given capex of 0.36; investing CF in aggregate was not disclosed. Financing CF was -3.92, suggesting outflows (debt repayment and/or dividends) funded by existing cash. Sustainability: if the negative OCF is timing-related, we expect normalization in H2; if collections remain slow or inventory stays elevated, cash conversion could remain weak. No clear signs of working capital manipulation are evident, but the divergence between NI and OCF merits close monitoring of AR days and billing milestones.

Dividend Sustainability

The calculated payout ratio is 84.4%, above the <60% benchmark for comfort and thus on the high side relative to current earnings. Dividend cash coverage cannot be precisely assessed due to unreported total dividends and investing CF, but core FCF is negative in H1, implying weak near-term cash coverage if dividends were paid. With strong liquidity and low leverage, the balance sheet can support dividends tactically; however, sustainable coverage requires OCF recovery in H2. Policy outlook likely hinges on management’s commitment to stable dividends; absent confirmed YoY and guidance, we treat the current payout as elevated and sensitive to cash conversion.

Risk Assessment

Business Risks:

• Project execution risk leading to margin slippage in fixed-price contracts
• Engineer wage inflation pressuring gross margins and retention
• Client IT budget moderation delaying orders or acceptance timing
• Goodwill/intangible impairment risk if acquired units underperform
• Dependence on key customers or verticals (concentration risk not disclosed)

Financial Risks:

• Negative OCF in H1; reliance on H2 collections to fund dividends and capex
• Receivables build and potential elongation of DSO
• Potential need to use cash reserves for financing outflows if OCF lags
• Limited non-operating income buffer; earnings are sensitive to core delivery

Key Concerns:

• OCF/NI at -0.44x flags earnings quality concerns
• High payout ratio (84.4%) versus negative core FCF in H1
• Intangible-heavy balance sheet raises impairment sensitivity
• Lack of YoY disclosures limits visibility on growth and margin trajectory

Investment Implications

Key Takeaways:

• Healthy P/L with operating margin ~5.6% and minimal non-operating noise
• Liquidity and solvency are strong; balance sheet conservatism intact
• Earnings quality is weak this half due to negative OCF versus positive NI
• ROE of 5.4% is modest; ROIC of 7.8% is near value-creation threshold
• Goodwill/intangibles represent ~18.6% of assets, requiring monitoring

Metrics to Watch:

• OCF rebound and DSO trend in Q3–Q4
• Backlog and utilization rate to gauge H2 operating leverage
• Gross margin trajectory and mix (higher value-added vs staffing-heavy work)
• SG&A growth versus revenue growth
• ROIC versus 8%+ target and cash conversion ratio (OCF/NI >1.0)

Relative Positioning: Within domestic IT services/embedded engineering peers, PCI shows typical mid-single-digit operating margins with stronger-than-average balance sheet resilience, but trails peers that deliver higher cash conversion and double-digit ROE; H2 execution on collections and utilization will determine whether it closes the gap.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis